Faculty of Science and Technology

MASTERS THESIS
Study program/ Specialization:
Spring semester, 2015
Masters degree programme
in Offshore technology/
Industrial Asset Management

Open / Restricted access

Writer: Byungmu Ahn

(Writers signature)

Faculty supervisor: Jayantha Prasanna Liyanage

External supervisor(s):

Thesis title:

Managing the Efficiency of Foreign Engineering Contracts

: A Study of a Norwegian and South Korean Project Interface

Credits (ECTS): 30
Key words:
Pages:
International project
Norwegian operator
South Korean shipyard
Communication and coordination
EPC contract

130

+ enclosure:

Stavanger, 15.06/2015
Date/year

Front page for master thesis

Faculty of Science and Technology
Decision made by the Dean October 30th 2009

Managing the Efficiency of Foreign Engineering Contracts:

A Study of a Norwegian and South Korean Project
Interface

Abstract
The oil and gas exploration and production industry in the North Sea has been challenged extensively over
the last decade with increasing cost profiles. This condition, together with relatively low oil prices, has
begun to squeeze the commercial margins of a large number of industrial assets. Foreign engineering
contracts have become a common trend in this context for those seeking significant cost advantages during
the engineering phase of major offshore facilities. However, this popular strategy has been met with
serious debates due to many critical issues experienced in complex engineering projects.
In last few years, many Norwegian offshore oil and gas field development projects were awarded to Asian
contractors. Despite of the commercial incentive to improve cost-effectiveness of those projects, reports
and analyses have revealed that most of them have failed to deliver on time and budget during their
execution phase. This makes the economics of projects on the Norwegian continental shelf more
vulnerable to the recent oil market downturn. At the same time, it also has raised concerns about the
efficiency of the coordination and communication management process of large-scale projects under EPC
(Engineering, Procurement, and Construction) contracts.
This study investigated the key elements contributing to project coordination and communication
challenges and resulting delays in schedule and cost overruns of EPC projects awarded to shipyards in
South Korea. In order to identify the key elements, principal data were gathered using in-depth, openended, guided interviews with Norwegian operators, sub-contractors, and authorities, involving those who
have long experience with EPC projects awarded to South Korean shipyards. The paper will define and
discuss how the key elements regulate the efficiency of complex engineering projects involving
Norwegian operators and foreign contractors. It will also suggest how to improve the current situation and
enhance overall project performance.

Table of Contents

Abstract .......................................................................................................................................................... I
Table of Contents .......................................................................................................................................... II
List of Figures ............................................................................................................................................. VI
List of Tables .............................................................................................................................................. VII
1.

2.

Introduction ........................................................................................................................................... 1
1.1.

Background ................................................................................................................................... 1

1.2.

Statement of the Problem .............................................................................................................. 2

1.3.

Research Purpose .......................................................................................................................... 2

1.4.

Research Questions ....................................................................................................................... 3

1.5.

Delimitations of the Study ............................................................................................................. 3

1.6.

Thesis Structure ............................................................................................................................. 3

Literature Review .................................................................................................................................. 5

2.1.

2.1.1.

Project management .............................................................................................................. 5

2.1.2.

International project problems ............................................................................................... 6

2.1.3.

Management of culture .......................................................................................................... 8

2.2.

3.

International Project ...................................................................................................................... 5

EPC Contract Form ....................................................................................................................... 9

2.2.1.

EPC contracts ........................................................................................................................ 9

2.2.2.

Characteristics ..................................................................................................................... 10

2.2.3.

Advantage and disadvantage ............................................................................................... 10

2.2.4.

EPC contract types .............................................................................................................. 11

2.2.5.

Single point of responsibilities ............................................................................................ 12

Methodology ....................................................................................................................................... 14
3.1.

Research Strategy ........................................................................................................................ 14

II

3.1.1.

Iterative research strategy .................................................................................................... 14

3.1.2.

Qualitative research ............................................................................................................. 14

3.2.

Research Design .......................................................................................................................... 15

3.3.

Data Collection ............................................................................................................................ 15

3.3.1.

Primary data ........................................................................................................................ 15

3.3.2.

Secondary data .................................................................................................................... 17

3.3.3.

Reliability and Validity ....................................................................................................... 17

3.4.
4.

Norwegian Field Development Projects in South Korea..................................................................... 19

4.1.

Norwegian Offshore Field Development Projects....................................................................... 19

4.1.1.

Project execution phase ....................................................................................................... 19

4.1.2.

Project cost overrun in NCS ................................................................................................ 21

4.2.

5.

Data Analysis .............................................................................................................................. 18

South Korean Shipbuilding Industry ........................................................................................... 24

4.2.1.

Brief introduction ................................................................................................................ 24

4.2.2.

Competitive edges ............................................................................................................... 26

4.2.3.

Tough times ......................................................................................................................... 27

4.2.4.

Transition into offshore segment ......................................................................................... 27

4.2.5.

New challenge from offshore business................................................................................ 29

Findings ............................................................................................................................................... 35
5.1.

Key Contributory Factors ............................................................................................................ 35

5.1.1.

Cultural Difference .............................................................................................................. 35

5.1.2.

Shipbuilding Industry Practice in South Korea ................................................................... 45

5.1.3.

Engineering Management .................................................................................................... 54

5.1.4.

EPC contract ........................................................................................................................ 63

5.2.

Communication and Coordination Challenges ............................................................................ 67

5.2.1.

Communication between Norwegian and Korean ............................................................... 68

5.2.2.

Within EPC contractor ........................................................................................................ 72

III

6.

5.2.3.

Interpretation of contractual relationship ............................................................................ 76

5.2.4.

Norwegian Operator ............................................................................................................ 79

5.2.5.

Engineering sub-contractor ................................................................................................. 83

5.2.6.

Oversea vendors .................................................................................................................. 85

5.2.7.

Local service sub-contractor................................................................................................ 86

Recommendations ............................................................................................................................... 88
6.1.

6.1.1.

How different they are in relative terms .............................................................................. 88

6.1.2.

Alignment of expectations ................................................................................................... 89

6.1.3.

How to achieve the goal in different circumstance ............................................................. 91

6.2.

General communication in person ....................................................................................... 93

6.2.2.

Communication between organization ................................................................................ 97

6.2.3.

Formal communication line ................................................................................................. 99

What to Support......................................................................................................................... 102

6.3.1.

Communication within EPC contractor............................................................................. 102

6.3.2.

Communication between EPC contractor and sub-contractors ......................................... 103

6.3.3.

Support EPC contractors engineering function ................................................................ 104

Discussion and Conclusion................................................................................................................ 106

7.1.

8.

How to Communicate .................................................................................................................. 93

6.2.1.

6.3.

7.

How to approach the challenges? ................................................................................................ 88

Overview of Results .................................................................................................................. 106

7.1.1.

Four key contributory factors ............................................................................................ 106

7.1.2.

Communication and coordination challenges.................................................................... 107

7.1.3.

Recommendation ............................................................................................................... 108

7.2.

Suggestions for Future Study .................................................................................................... 109

7.3.

Challenges ................................................................................................................................. 110

Conclusion ......................................................................................................................................... 112

Reference ................................................................................................................................................... 113

IV

Appendix A ............................................................................................................................................... 119

Interview protocol ............................................................................................................................. 119

List of Figures
Figure 2-1 Life cycle of building and construction project (Morris, 1988 cited in Gardiner, 2005) ............. 6
Figure 4-1 Exploration & production project development model (Odland, 2013) .................................... 19
Figure 4-2 Project development (Odland, 2013) ......................................................................................... 20
Figure 4-3 Commitment to cost and technical issues (Gudmestad, Zolotuchin and Jarlsby, 2010) ............ 21
Figure 4-4 Total value of ship delivered (2007-2013) (OECD, 2014) ........................................................ 24
Figure 4-5 Market share by shipbuilding order intake (Sung and Lee, 2015) ............................................. 25
Figure 4-6 Break down of order intake by ship type (Sung and Lee, 2015) ............................................... 25
Figure 4-7 Floating production units market share 2005-2009 (Koshipa, 2011) ........................................ 28
Figure 4-8 New order intake of the Big 3 2012 to 2014 (Han, 2015) ......................................................... 28
Figure 4-9 QUARTERLY FINANCIAL PERFORMANCE OF HHI (HHI, 2015) ................................... 30
Figure 4-10 QUARTERLY FINANCIAL PERFORMANCE OF SHI (SHI, 2015; Kang, 2015) .............. 30
Figure 4-11 QUARTERLY FINANCIAL PERFORMANCE OF DSME .................................................. 31
Figure 4-12 Unbilled account receivable of the Big 3 (HHI, 2015; SHI, 2015; DSME, 2015) .................. 31
Figure 4-13 Big 3s New order intake in offshore segment (Cheon, 2015d) .............................................. 33
Figure 4-14 Big 3s new order intake in shipbuilding and offshore segment (Cheon, 2015d) ................... 34
Figure 5-1 Comparison between Norway and South Korea (Hofstede and Hofstede, 2005) ...................... 36
Figure 5-2 Communication patterns between organization ......................................................................... 42
Figure 5-3 Labor productivity comparison in Shipbuilding industry (Ecorys, 2009) ................................. 46
Figure 5-4 Head count development of South Korean shipbuilding industry ............................................. 50
Figure 5-5 Headcount development (Offshore segment) ............................................................................ 51
Figure 5-6 Ratio of Sub-contractor (Tech. & crafts.) to Shipyard Engineer ............................................... 52
Figure 5-7 Information flow ........................................................................................................................ 60
Figure 5-8 Communication patterns within South Korean EPC contractor ................................................ 75
Figure 5-9 Contractual relationship in shipbuilding project ........................................................................ 77
Figure 5-10 Contractual relationship in offshore EPC project .................................................................... 78

VI

List of Tables
Table 3-1 Difference between Quantitative and Qualitative research (Bryman, 2012) .............................. 14
Table 3-2 Interview participants.................................................................................................................. 16
Table 4-1 Norwegian project awarded to East Asian shipyard ................................................................... 22
Table 4-2 Norwegian Offshore projects awarded to Big 3 .......................................................................... 29
Table 5-1 Hall's low-context/high-context approach (Ulven, 2004) ........................................................... 37
Table 5-2 Norwegian business practices observed by South Korean (INTSOK, 2014) ............................. 72
Table 6-1 Difference between Norway and South Korea............................................................................ 88
Table 6-2 Classification of differences........................................................................................................ 91
Table 6-3 3D modeling software in use (ETRS, 2015) ............................................................................. 105

VII

1.

Introduction

1.1.

Background

The last decade with its strong oil market resulted in a significant increase in field development costs
worldwide. Oil and gas field development costs almost quadrupled between 2001 and 2012, while
production grew by only 2% (Statoil, 2014).
Norway, the 5th largest oil exporter in the world, has not been immune to the high cost in the oil and gas
industry. The high compensation level in the manufacturing industry of Norway (TCB, 2014) put much
pressure on the economic viability of new field development projects. In an attempt to tackle the high cost
challenges, Norwegian operators have made various efforts to bring development cost down for each and
every phases of offshore oil and gas field development projects. For the execution phase, where intensive
input of labor is required, notoriously high labor cost in Norway provided a strong incentive for
Norwegian operators to eye East Asian contractors rather than Norwegian players. East Asian shipyards
won fabrication contracts from Norwegian operators in the mid to late 1990s. As cost levels in Norway
kept escalating, Asian yards also appeared to be successful in securing more projects with higher budget
and complexity, including multiple EPC (Engineering, Procurement, and Construction) projects, in the
late 2000s and early 2010s.
What was delivered for such high profile projects, however, was not something the Norwegians expected.
Many of these projects suffered from huge cost overruns, significant delays in schedule, and low quality.
In its report in 2013, the NPD (Norwegian Petroleum Directorate) stated that the Skarv FPSO (Floating
Production Storage Offloading unit), built by South Korean and Singaporean contractors, suffered
significant cost overruns of 32% in total (NPD, 2013). More recently, the Goliat FPSO, delivered from
South Korean yard, reportedly hit a 49% cost increase (Haugstad, 2015).
Bad experiences with East Asian shipyards, together with already expensive field development cost levels
in Norway, deepened Norwegian operators concerns over the high risk potential of cost overruns for new
projects in the Norwegian Continental Shelf (NCS). Such concerns and the recent oil price drop pose
serious challenges to the Norwegian oil and gas industry and resulted in a series of postponed executions
of fresh field development projects late last year and early this year.

Given that the market consensus is that oil prices will remain volatile for years to come, it is essential to
make industry-wide effort to gain more control over cost development during the project execution phase.

1.2.

Statement of the Problem

Many of projects awarded to East Asian shipyards by Norwegian operators have been adversely impacted
by significant time and cost overruns. It is of critical importance for the whole Norwegian oil and gas
industry to address this challenge, and many researches have been conducted about how to do this. Most
of the researchers working on this issue have adopted a broad view approach to cover the whole project
life cycle or project development phases (see 4.1.1). This approach helps locate the activities that should
be improved to prevent cost overruns from the wide perspective involving multiple of project phases.
Although the researchers were diligent in this respect, their findings have not been sufficient to provide
practical implications to Norwegian companies that were actually involved in the projects at East Asian
shipyards. When it comes to the project execution phase, the previous research findings have limited
practical implications, highlighting only the significance of Norwegian operators responsibility and
emphasizing the importance of the operators obligation to carry all the burdens. Although it is true that
the operators should assume such responsibility, the research could have moved one step beyond this and
touched upon the practical problems that arise at the East Asian shipyards and, thus, trouble Norwegian
players.

1.3.

Research Purpose

The purpose of this thesis is to provide the Norwegian oil and gas industry with insights into how to deal
with difficulties arising during the execution phase of Norwegian EPC projects in South Korean shipyards
effectively. For the last few years, the majority of the projects have gone to South Korean contractors in a
form of EPC contracts, and many of these projects are known to suffer from cost and schedule overruns.
To provide these insights, I investigated the practical problems occurring during the projects which were
either recently completed or are currently under construction at the shipyards using a phenomenology
approach to understand and describe such challenges. Primary research data were collected via in-depth,
open-ended, semi-structured interviews, and secondary data were gathered through various resources. In
addition to providing these insights, I also provide suggestions for the Norwegian players to be better
prepared for the challenges that may arise.

1.4.

Research Questions

This thesis aims to answer following research questions developed from the statement of the problem:

What are key factors that contribute to challenges arising from Norwegian EPC project at South
Korean shipyards?

1.5.

How do such factors play out and create problems in practice?

Delimitations of the Study

Project management is a broad and complex subject where many different approaches can be taken for a
research activity. Thus, some constraints are necessary for practical reasons. For this study, the constraints
include the following:

The research task is restricted to the execution phase of Norwegian EPC project at South Korean
shipyards. Hence, any potential factors contributory to cost overruns that originally emerge from
preceding phases in the course of project development, (i.e., feasibility study, concept selection,
FEED) are not of consideration in this study.

This study investigated Norwegian EPC projects in South Korea where the project deliverables
require high technical complexity, such as topside or offshore units with new concepts. Thus,
projects with relatively low complexity were not taken into consideration.

EPC contract comes in many variants. The effect of such variants on the project is beyond the
scope of this study. In this study EPC contract denotes EPC contract and all its variants.

Compensation schemes of EPC contracts also come in many variants. The effect of such variants
on the projects is also beyond the scope of this study.

Another constraint is the focus of the study on two distinct features of Norwegian EPC project in
South Korea: the management of international project and the use of the EPC contract format. The
features provide primary inputs to the study design, as discussed in Chapter 3.

1.6.

Thesis Structure

This thesis is presented in eight chapters. Chapter 1 provides the context for the study, describes the task,
and offers definitions of terms used in the study. Chapter 2 presents a review of existing literature relevant
to the thesis topic and identifies the focus area of the study. Chapter 3 contains the research methods along

with the study limitations. Chapter 4 provides an overview of Norwegian field development projects
awarded to East Asian yards and an introduction to the South Korean shipbuilding industry. Chapter 5
presents the study findings, where the key influential factors are described and how they create challenges
is illustrated. Chapter 6 contains recommendations for Norwegian companies to help them mitigate the
challenges in EPC projects in South Korea. Chapter 7 offers areas of potential future study and discusses
challenges for this study. The thesis reaches conclusion at Chapter 8.

2.

Literature Review

This chapter provides presentation of the two major features of Norwegian EPC project in South Korea,
that is, the management of international projects and the use of the EPC contract format.

2.1.

International Project

2.1.1. Project management

Project and project management
According to the Project Management Institution (2005), the term project can be defined as a temporary
endeavor undertaken to create a unique product, service or result. Gardiner (2005) points out three
characteristics of projects as being important: unique, temporary, and progressive elaboration. Every
project is unique and exists for a limited time only. As a project progresses, required work is defined in a
gradual, progressive manner with increasing degree of detail and elaboration. Project management is to
conduct project activities utilizing knowledge, skill, and tools, to satisfy project requirement (PMI, 2015).
Project life cycle
According to Gardiner (2005), the project life cycle is comprised of four phases: initiation and definition,
planning, execution and control, and closure.

Initiation and definition

The project officially starts. The project scope is established and deliverables are determined.
Feasibility and project assessment are conducted to justify the project and provide a basis for
go/no go decision.

Planning and development

Important documents that form the basis of project control are produced. The plans created
include the work plan and schedule, resource and budget plans, procurement plans and contract
strategy, risk and quality management plans, document management plans, and project control
plans. Detailed plans for project management and organization are delivered. It is in this phase
that task independence is established, critical path is determined, and the schedule is developed.

Execution and control

5

Project deliverables are constructed. Thus, most of the resources are used, and control is critical
in this phase. As project progresses, better descriptions of the project end product are obtained.
Changes requested should be properly managed to minimize their impact on critical success
factors of the project.

Closure
The budget is closed and documentation is completed. Any conflicts and disputes among project
stakeholders are settled. Official evaluation of the project as a whole can take place.

Life cycle of building and construction project is presented in Figure 2-1.

FIGURE 2-1 LIFE CYCLE OF BUILDING AND CONSTRUCTION PROJECT

(MORRIS, 1988 CITED IN GARDINER, 2005)

2.1.2. International project problems

International projects involve project stakeholders from two or more countries (Turner, 2009).

Cost of communication is a major challenge

By its nature, an international project entails specific challenges. Among them, Turner (2009) underlines
high cost of communication, in particular, as a major project challenge in the international context. He
identifies five problems that operate as boundaries for international project teams and increase
communication cost.
Culture
Hofstede and Hofstede (2005) defines culture as a collective programming of mind that makes a group
and its members distinct from others. Major challenges in international projects arise from differences in
the cultures. The programming governs how people behave and think. Thus, in international projects, it is
critical to understand the culture of your project team members or counterparts in order to communicate
efficiently.
Distance
Turner (2005) presents various dimensions of distance.

Geographical distance: Different locations make communication less efficient.

Time zone: overlapping working hours between two locations affects communication.

Organizational behavior: Each organizations structure and corporate culture is unique, so new
comers should learn about these elements in order to work efficiently.

Profession: The distinct work habits or mindsets of each person influence the degree of distance
between people.

Organization, management, and communication

In international projects, different organization structures are required to handle various issues:
collaboration with partners, national interests, local contents requirements, local administrative
regulations, and so on.
Productivity and logistics
The productivity of local employees can vary. Local practice, social security, and employment legislation
should be taken into consideration.
Local legislation and regulation
International projects should be in compliance with relevant law of the country.

2.1.3. Management of culture

Turner (2009) cites culture as the most important factor for international projects, as it has a significant
impact on the cost of communication.
2.1.3.1. Cross-cultural analysis
Hofstedes five dimensions of culture
Many researchers have presented various theories of culture. Among them is Hofstedes five dimensions
approach. It provides useful tools to compare different cultures.
Hofstede and Hofstede (2005) identifies five dimensions of culture as below:

Power distance
The extent to which power differentials within an organization is accepted by less powerful
people.

Individualism versus Collectivism

The degree to which members of a society are interdependent with each other.

Uncertainty avoidance
The extent to which members of a society are tolerant of uncertainty of the future.

Masculinity versus Femininity

The extent to which two biological definitions of male and female are used to assign different
roles for each sex.

Long term versus Short term orientation

How a society associates itself with its own past while dealing with its present and future.

Halls low-context/high-context approach

Another useful way to examine the difference in culture is Halls low-context/high-context approach. In a
low context society, the word spoken delivers explicitly and exactly the message of the speaker. In
contrast, to interpret the speakers message in high context society, listeners should take into account the
context where the conversation takes place as well as the word spoken (Griffin and Pustay, 2003).

2.1.3.2. Cultural fit of project management

Project management as discipline is not applicable universally.
Turner (2009) emphasizes the nature of project management as a social science which inevitably requires
different approaches for its application in different culture. Svein-Arne Jessen studied the performance of
different countries at each stage of project life cycle based on the five dimensions theory of Hofstede
(Turner, 2009). The researchers findings show that project management, as a discipline, is a problem
solving approach that mainly fits western countries (Jessen, 1993 cited in Turner, 2009). Project
management as a discipline provides structural tools developed for planning, organizing, controlling, and
executing project. According to Jessens research (1993 cited in Turner, 2009), the tools appear to be a
good match for most of European countries. In contrast, other countries in Asia including Japan, Thailand,
Philippines, and Malaysia, seem not to fit well with the project management techniques (Jessen, 1993
cited in Turner, 2009). This contradicts with common belief that the project management discipline, which
developed in Western world, is straightforward enough to learn and apply universally. Turner (2009)
argues that this accounts for why the project management model is not effective for international projects
involving different cultural clusters. Further, he claims that Western countries should see beyond the
project scope to address challenges arising from cultural differences.

2.2.

EPC Contract Form

2.2.1. EPC contracts

New build projects for offshore platform topside or offshore mobile units of a newly developed concept
represents high degree of uncertainty and technical complexity.
The EPC contract format has normally been used for offshore platform topside projects in NCS (INTSOK,
2014). Under this contract format, the main EPC contractor is responsible for all the major functions of
project. It is obligated to deliver the project for the agreed price, on guaranteed time, and with the required
level of quality (Schramm, Meiner and Weidinger, 2010).
Detailed design is produced during in engineering phase. Procurement activities follow to purchase
equipment and materials, which will be used for construction of the structure or facilities. Conducting
these major functions for each phase involves a number of different entities and, thus, requires extensive
interface management activities.
9

Under the EPC contract format, the EPC contractor and the operator, who owns the project, have distinct
roles. The EPC contractor serves as a single point of responsibility, communication, and coordination
(Schramm, Meiner and Weidinger, 2010) for major project activities. Hence, almost all risk is shifted
from the operator to the EPC contractor. The operators task as the project owner includes contract
management concerning contractual relationship with the EPC contractor and interface management
across multiple entities (Schramm, Meiner and Weidinger, 2010). Situated at the center of the EPC
contractual relationship, the EPC contractor has to deal with the operator and many sub-contractors. In
particular, the EPC contractor needs to ensure that its sub-contractors comply with all requirements from
the operator while carrying out their own tasks.

2.2.2. Characteristics
According to Schramm, Meiner and Weidinger (2010), the key characteristics of the EPC contract format
includes the following:

The EPC contractor acts as a single point of responsibility for work performance, communication,
and coordination;

Full dependence on one contractor;

Guaranteed delivery date, performance;

Clear distinction between obligations and liabilities; and

A relatively long tendering process and initial engineering phase negatively affect the project
schedule.

2.2.3. Advantage and disadvantage

Advantages and disadvantages of the EPC contract format in general are presented below (Baram, 2005;
Johannsen, 2013).
Advantages

Higher efficiency expected because one contractor is responsible for both engineering and
construction.

Earlier knowledge of full work scope, cost, and time of project

Opportunities for innovation and fast tracking construction

A customized approach for the project

Fewer changes
10

More flexibility to address changes

Reduced conflict and dispute in general

Improved risk management

Reduced project supervision activities

Streamlined contractor interface

Transfer of cost risk to the EPC contractor

Transfer of schedule risk to the EPC contractor (disadvantage for the EPC contractor)

Transfer of risk associated with operator supplied items (disadvantage for the EPC contractor)

Transfer of risk associated with Guarantee for performance (disadvantage for the EPC contractor)

Allows for innovation for value engineering and constructability by the EPC contractor

Streamlined procurement process by the EPC contractor

Disadvantages

Operator has less control and involvement in design

Difficult to compare design alternatives

Risk associated with usually shorter delivery period

Transfer of cost risk to the EPC contractor can lead to substantial risk premium

The EPC contractor is incentivized to apply minimum compliant standard in order to reduce cost

Limited number of qualified EPC contractors

Quality assurance and quality control largely managed by EPC contractors

Disputes are likely to be larger and more complicated

Often the contract is awarded before project is fully defined

2.2.4. EPC contract types

Variants of EPC contract format
The main concept of the EPC contract format is that it can be extended to add more functions of project
into its work scope. The variants of the EPC contract format include the following (Odland, 2013):

EPC

: Engineering + Procurement + Construction

EPCI

: Engineering + Procurement + Construction + Installation

EPCIC : Engineering + Procurement + Construction + Installation + Commissioning

11

EPCI is often referred to as EPCH with a focus on hook-up function of offshore construction project.
EPCIC is normally used for new build projects of mobile offshore drilling units, such as drillship, semisubmersible drilling rig, and jack-up rig (INTSOK, 2014).
Compensation schemes
The impact of the compensation system on the project is not within the scope of the study, so it is
introduced only briefly in this section.
There exist various compensation systems applicable to the EPC contract format. The most frequently
used approaches includes lump sum price, target price, unit price, and cost reimbursable (Gloria,
Siegfriedt and Carstens, 2011; Gardiner, 2005).

Lump sum price

The contractor offers a fixed price for fixed scope of work. Fewer operators resources are
required as compared to other compensation schemes. The operator has less control and changes
can be expensive. There is a high potential for dispute because the contractor is focused on
reducing cost.

Target price
Functional and technical scopes are well defined, but physical scope is not sufficiently defined
for the contractor to offer a fixed price. The contractor is encouraged to save cost. The operator
should be able to make good estimation of target price.

Unit price
The technical scope is established, but the quantity is not certain. The operator can have some
control to determine the quantity of the work units but also takes risks for the total quantity.

Cost reimbursable
The operator compensates the contractor for all work performed. The work scope is not well
defined, and many changes are expected. The operator can also choose this approach to control
the contractors performance. The operator can have influence over the resources assigned by
contractor.

2.2.5. Single point of responsibilities

The main feature of the EPC contract format is that an EPC contractor serves as a single point of
responsibilities for the project. The responsibilities can be broken down into two parts: responsibility for
major functions and interface management.

12

For the former, an EPC contractor takes responsibility for major functions including engineering,
procurement, construction, and project control. Because one contractor can rarely perform all the
functions required to be an EPC contractor, it sub-contracts some of the functions to other entities or
forms a consortium or joint venture. Still, responsibility for the performance of sub-contractors lies with
the EPC contractor.
For the latter, an EPC contractor serves as a single point of responsibility for management of interfaces
between functions and among project stakeholders. The EPC contractor addresses interface issues by
recording and tracking interface information and by opening communication channels among the operator,
the EPC contractor itself, and the sub-contractors. To do this the EPC contractor takes a leading role for
communication and coordination activities across boundaries between functions and among subcontractors.

13

3.

Methodology

This chapter describes how the study was conducted including a discussion of the research methods and
data collection and analysis. This discussion is followed by a review of the studys limitations.

3.1.

Research Strategy

3.1.1. Iterative research strategy

In order to answer the research questions in 1.4, I used primarily inductive reasoning. This approach
involves making observations, making inferences, finding their implications, and putting these into
general perspective so as to develop a theoretical model. Bryman (2012) notes that deductive elements are
also often required in the course of inductive reasoning sequence. Analysis of data collected through the
inductive process can entail a need of gathering further data to test the theory. This iterative strategy
(Bryman, 2012), where a researcher moves back and forth between data and theory, is used extensively
throughout this study.

3.1.2. Qualitative research

As a general orientation to the present study, it is worth noting the difference between quantitative and
qualitative approaches. Table 3-1 contains a summary of their differences.
Item

Quantitative

Principal orientation to the role of

Deductive; testing of theory
theory in relation to research

Qualitative
Inductive; generation of theory

Epistemological orientation

Natural science model, in

particular positivism

Interpretivism

Ontological orientation

Objectivism

Constructionism

Table 3-1 Difference between Quantitative and Qualitative research (Bryman, 2012)
In a qualitative research such as the present study, the inductive reasoning sequence provides a principal
method to generate theory, which tends to be the primary focus of the study. Though guided by informed
methods and additional research, these theories arise from the researchers interpretations of the data and
the social phenomenon (Bryman, 2012).

14

3.2.

Research Design

Within the domain of qualitative research, there are a number of approaches researchers may take such as
narrative research, phenomenology, ethnography, grounded theory, case study, life history, and many
more. The research approach determines how to structure study and collect and analyze data; thus, each
approach has its own focused area and a type of problem for which the approach is designed (Creswell,
2007).
In his book, Creswell (2007) provides features of the phenomenology approach. This approach puts
emphasis on drawing from share experiences to describe core elements of a certain phenomenon.
Phenomenology researchers analyze multiple of individual experiences to uncover a larger social
phenomenon. Data in phenomenology approach is collected through interviews, for the most part, and is
supplemented by relevant documents and observations.
The present study is conducted to describe the challenges in Norwegian EPC projects in South Korean
shipyards, what factors create the challenges, and how these factors come into play. To do this, I adopt a
phenomenological design to better understand the essence of the EPC projects (that is, the phenomenon as
an objective of this study), using interviews with various project stakeholders to collect primary data.
These data are combined with a review of the relevant literature and observations of the phenomenon.

3.3.

Data Collection

3.3.1. Primary data

In-depth, open-ended, semi-structured interview
Qualitative data were collected through in-depth, open-ended, semi-structured interviews to describe and
better understand the Norwegian EPC projects at South Korean shipyards. The interviewer asked the
participants to provide their own experience and observations in their own words.
Interview participants
Forty-four individuals who have work experience in Norwegian EPC projects awarded to South Korean
shipyards participated in the interviews. These participants were involved in six different EPC projects,
each with its own variant: Goliat, Aasta Hansteen topside and substructure, CAT-J, Gina Krog, and
Marina. The interviewees were from 13 companies covering four project stakeholder groups: Norwegian
15

operators (2), South Korean shipyards (3), Norwegian suppliers (5), and local service sub-contractors (3).
Every interview participant had been previously involved in, or was currently working on, one of the EPC
projects.
The interviewees had different positions in different disciplines within their organizations, from project
director to discipline engineer.
Group
Operator
Shipyard
Supplier
Local sub-contractor

# of personnel
Manager level
26
21
9
4
6
5
3
TABLE 3-2 INTERVIEW PARTICIPANTS

Discipline level
5
5
1
3

Interview questionnaire
The interview questions were developed with a focus on main features of Norwegian EPC projects at
South Korean shipyards: management of international projects and use of the EPC contract format.
Presentation of the two features in Chapter 2 provided inputs for the interview questionnaire.
Key elements of the questionnaire were from the two features. Regarding management of international
projects, two elements were determined: cultural difference and significant communication cost. Turner
(2009) identified the latter as a major challenge for international projects and highlighted the former as a
major contributing factor to the challenge. For use of the EPC contract format, capability of an EPC
contractor to perform major project functions and manage communication and coordination issues was
considered a key element. The most distinctive characteristic of the EPC contract format is that the EPC
contractor is responsible for performance of all project functions (engineering, procurement, construction,
and project controls) and management of interfaces between the functions and among tis sub-contractors.
Pertaining to the interface management role of the EPC contractor, in particular, the contractors
communication and coordination competency are of particular importance to the EPC projects. This
importance is also noted by Schramm, Meiner and Weidinger (2010), who indicate that communication
and coordination issues are major cause of interface problems.
As project owners, Norwegian operators are positioned to have an overview of the project. Thus, the
questionnaire for the operator covered all the foregoing elements. The questionnaire designed for the
operators is presented in Appendix A. The same general questions were used with other project
stakeholders, though these stakeholders were not asked questions about aspects of the project that are not
relevant to their work scope.

16

Interview administration
Interviews were conducted at the participants work place in both Norway and South Korea according to
pre-developed interview protocol (see Appendix A). Interviews were recorded when the interviewee
agreed and when and the situation permitted. Out of the 44 interviews, 18 were recorded. Interviewees
were informed that they would remain anonymous and that they could choose not to answer any questions.
I exercised the flexibility embedded in design of the semi-structured interview to ask additional relevant
questions or skip those not suitable to the participant based on her or his position and experience.

3.3.2. Secondary data

Secondary data were also used for this study. These secondary data, which had been collected and
produced by someone else, help to form the theoretical basis for the conclusions I drew from my analysis
of the primary data. The secondary data used for this study came from books, online databases, academic
papers, as well as news articles. These materials were accessible either via the library at the University of
Stavanger or online and were collected over the course of the study. These secondary sources included
both quantitative and qualitative data.

3.3.3. Reliability and Validity

Reliability
According to Bryman (2012), reliability refers to the degree to which the outcome of the study will be
repeatable. Reliability also concerns consistency of the measures deployed in the study. These measures
provide researchers with the tools to draw implication from data, develop theory, and establish a logical
sequence in support of generalization of the theory. Thus, as Bryman (2012) notes, the stability of the
measures is an issue in qualitative research.
Similarly, the reliability of the primary interview data is of concern. Interviewees responses can be
affected by their daily work situation, interest in the topic, and many other variables. In particular, when
the interviewees are engaged in a troubled project, they might be more cautious in providing accounts and
could deviate from discussing the full situation even when anonymity is offered. Thus, interviewers must
be diligent and conscientious when asking questions, especially follow-up questions. Recording the
interviews also helps to ensure reliability, e.g., by allowing for better subsequent transcripts.

17

Validity
Validity refers to whether the measures deployed to assess a concept accurately assess the specific concept
they are supposed to and, for the purposes of a study, the concepts the study is designed to address
(Bryman, 2012). For this study, the overall validity of the primary data is high because all of the interview
participants are or had been directly involved in the object phenomenon, i.e., Norwegian EPC projects in
South Korea. Still, the fact that some of the interviewees had a relatively short experience in the projects
may weaken the validity. In particular, experience shorter than six months might have not been long
enough for the participant to see the big picture of the project.
In addition to differences in the personal experiences of the interviewees, there were differences in the
actual projects themselves. This variability could also weaken the validity of the study. As noted
previously, interview participants had been or are engaged in one of six different projects. Each project is
unique by definition and involves a different operator, shipyard, supplier, and local sub-contractors.
Furthermore, corporate culture of the South Korean shipyards seemingly demonstrates certain variance
from company to company, and this variance has substantial influence over the project execution.
The positions that study participants held also affect validity. Manager level personnel can have a view
over full scope of project, but their account can conflict with observations from discipline level engineers,
who focus on specific issues addressed in low level of the organization hierarchy.

3.4.

Data Analysis

Creswell (2007) presents a simplified procedure of data analysis in phenomenology approach:

Organize the data and create files,

Read the data thoroughly with notes on key elements,

Describe the personal experience in full,

Make a list of significant statements and arrange them into larger information units,

Describe what the participant experienced and how the experience happened, and

Construct the essence of the phenomenon by combining the description of what and how.

Data analysis in this study followed the procedure presented above in general. Due to time constraint of
the study, however, more focus was on developing significant statements and essence of the phenomenon
while other processes received less attention. The data and its analysis are integrated into the contents
presented in Chapter 5 and 6.

18

4.

Norwegian Field Development Projects in South Korea

4.1.

Norwegian Offshore Field Development Projects

4.1.1. Project execution phase

Project development process
The development of offshore oil and gas resources requires massive capital investment and high
technology to address the considerable risk involved. In order to successfully manage the field
development project, operators have established project development models and strategies.

FIGURE 4-1 EXPLORATION & PRODUCTION PROJECT DEVELOPMENT MODEL (ODLAND, 2013)

19

Figure 4-1 illustrates the entire exploration and production project development model used in Norway,
which comprises comprehensive activities from evaluation of hydrocarbon potential to abandonment of
facilities. In particular, among the seven project phases comprising the model, appraisal and development
planning and project execution are jointly referred to as project development (Gudmestad, Zolotuchin
and Jarlsby, 2010). This is where huge capital input is needed and, thus, robust risk management approach
counts. Each phase of the project development phase comprises three sub-phases as shown Figure 4-2.

FIGURE 4-2 PROJECT DEVELOPMENT (ODLAND, 2013)

Appraisal and development planning phase

The appraisal and development planning phase consists of feasibility study, concept study, and preengineering.
Feasibility studies provide technical and economic justification of development of discovery and identify
multiple feasible development concepts (INTSOK, 2014). One final concept is selected through evaluation
of technical and commercial viability and the engineering design basis is produced in concept study.
During pre-engineering, the project business case is defined and documented. FEED (front-endengineering-design) is also developed and form a basis for project execution and tender process (INTSOK,
2014).
Project execution phase
The project execution phase comprises detail engineering, construction, and completion. During detail
engineering, a detailed design is developed, and the contract for procurement and construction is awarded.
Procurement activities follows, and the facility is constructed. Finally, the facility is installed and
commissioned for production start.

20

Figure 4-3 illustrates that most of the project development cost are incurred during detail engineering,
construction, and completion phases of a project, which constitute the project execution phase. This
suggests why project execution phase is prone to cost and schedule overrun and why the successful
management of this stage is critical to robust economy of the whole field development project.

FIGURE 4-3 COMMITMENT TO COST AND TECHNICAL ISSUES

(GUDMESTAD, ZOLOTUCHIN AND JARLSBY, 2010)

4.1.2. Project cost overrun in NCS

4.1.2.1. Renewed challenge
Project cost overrun is not a new topic in Norwegian offshore industry. It has been a hot-button issue for
decades in NCS, and many studies of it have been carried out. Nevertheless, the magnitude of the overrun
has grown drastically lately, and there is renewed market awareness of the issue.
Project awards to Asian contractor
In an attempt to tackle cost overruns in early 2000s in NCS, Norwegian operators initiated many cost
reduction approaches such as the development of low cost technology, standardization, etc. Among such
efforts was inviting more Asian contractors to submit proposals and win contracts so that the Norwegian
companies could take advantage of their cost competitiveness. Norwegian operators enjoyed the
competitive international market to meet its target range of project budget.
Some of the NCS offshore project (new build project for production floating unit, platform topside, and
new concept drilling units for NCS) awarded to East Asian contractors are shown in Table 4-1.
21

Balder
Norne
Varg
sgard A
sgard B
Kristin

Production
Type
FPSO
FPSO
FPSO
FPSO
Semisub
Semisub

2007 BP Norge

Skarv

FPSO

2007
2010
2010
2011

Gja
Ekofisk
Goliat
Valemon

Semisub
Jacket
FPSO
Jacket

2011 BG Norge

Knarr

FPSO

2011 Songa offshore

CAT-D

2011
2012
2013
2013

Heidrun
Martin Linge
CAT-J
CAT-J

Year
1995
1995
1996
1998
1998
2002

2013
2013
2013
2015

Operator
/Owner
Exxonmobil
Statoil
Saga Petroleum
Statoil
Statoil
Statoil

Statoil
Conocophillips
ENI Norge
Statoil

Statoil
Total
Statoil
Statoil

Field/Project

Semisub
MODU
FSU
Jacket
Jack-up MODU
Jack-up MODU

Contract

Shipyard

Conversion
Hull FC
Hull FC
Hull FC
Hull FC
Hull FC
Hull/Topside
FC
Hull FC
LQ FC
EPC
Topside EPC
Hull/Topside
FC

Keppel
Keppel
Keppel
Hitachi
DSME
SHI

Singapore
Singapore
Singapore
Japan
Korea
Korea

SHI

Korea

SHI
SMOE
HHI
SHI

Korea
Singapore
Korea
Korea

SHI

Korea

EPCI

DSME

Korea

DSME
SHI
SHI
Sembcorp

Korea
Korea
Korea
Singapore

Topside EPC
EPCI
EPCI
Topside and
Aasta
Statoil
Spar
substructure
HHI
Hansteen
EPC
Statoil
Gina Krog
Jacket
Topside EPC
DSME
Det Norske
Ivar Aasen
Jacket
Topside FC
SMOE
Statoil
Gina Krog
FSO
Conversion
Sembawang
TABLE 4-1 NORWEGIAN PROJECT AWARDED TO EAST ASIAN SHIPYARD

Korea
Korea
Singapore
Singapore

Use of EPC contract

Another approach to bring project cost down is use of the EPC contract form. NPD (2013) indicates that
the EPC contract type has been in dominant use among Norwegian operators to reduce time for project
implementation since introduction of Norwegian standard (NORSOK) process, which focuses on
improving chance of less project execution time.
4.1.2.2. Cost overrun in NCS
The outcomes of such effort did contribute to enhanced project economy and gave some comfort to
operators, but to a limited extent. Many NCS projects have still suffered from high cost increases. The
trend of project cost overrun has become even more predominant and intensified in the industry recently.

22

According to NPD (2013), projects with major cost and schedule overrun includes the Skarv with 32%
overrun as compared to cost estimate in PDO (plan for development and operation)/PIO (plan for
installation and operation), Yme with 188%, and Valhall redevelopment with 86%. The Knarr and
Bryunhild projects are also known to have experienced 36% and 58% increase in cost respectively (Torres,
2014). The Goliat FPSO, of which construction is recently completed, reportedly suffered from almost
50% increase (Haugstad, 2015).
There are also growing concerns among the industry players about the possible significant cost overrun for
ongoing projects. The CAT-D project allegedly underwent considerable cost overrun; construction of the
first drilling rig of the project is expected to complete in June 2015 (Maslin, 2015). According to Lvs
(2015), another three Norwegian projects (Gina Krog, Aasta Hansteen, and Martin Linge), which are ongoing as of May 2015, are also reportedly behind schedule.
4.1.2.3. Major causes to cost overrun
Many studies have been conducted to reveal what causes project execution cost overrun in NCS. In its
report in 2013, NPD found four key factors contributing to such cost overrun:

Deficiency in early engineering work, including FEED, resulted in frequent changes in

construction phase.

Contractor prequalification process was not handled thoroughly by operator.

The operators contracting strategy failed to incorporate all the key risk elements. The strategy
does not center on operators direct follow-up activities to EPC contractor and meticulous
prequalification of key equipment suppliers.

Operators follow-up was insufficient to address quality issues due to the oversea contractors
insufficient understanding of NORSOK and Norwegian standard.

In the industry, other cost increasing factors are being communicated:

Overly commercially driven management decision leads to overly ambitious target and to too
much emphasis on cost reduction without enough consideration of resulting detrimental impact on
quality.

Application of relatively new technology to flagship projects in harsher (farther, colder, and
deeper) offshore environments, where no project has been developed before, creates unexpected
technical challenges.

Contractors/suppliers pursue high profit margin in a bid to take advantage of cost increase trend.

23

4.2.

South Korean Shipbuilding Industry

4.2.1. Brief introduction

Since its entry into shipbuilding industry in 1970, South Korea has achieved dramatic success. South
Korean shipbuilding industry secured a top position in the competitive shipbuilding market by value and
second only to China by volume in 2014 (OECD, 2014).

FIGURE 4-4 TOTAL VALUE OF SHIP DELIVERED (2007-2013) (OECD, 2014)

In terms of value of ship delivered, South Korea has led the market for the last decade (Figure 4-4).

24

FIGURE 4-5 MARKET SHARE BY SHIPBUILDING ORDER INTAKE (SUNG AND LEE, 2015)
And by number of order intake, South Korea is ranked as the second in the world as of 2014 (Figure 4-5).

FIGURE 4-6 BREAK DOWN OF ORDER INTAKE BY SHIP TYPE (SUNG AND LEE, 2015)
Figure 4-6 indicates that South Korean focuses on new building of high value ships, such as containership
and LNG/LPG carrier, while China relies heavily on relatively low value ships, e.g. bulker carrier and
tankers.

25

4.2.2. Competitive edges

Bae, Lee and Park (2009) identify the core competencies of South Korean shipbuilding industry.

Skilled work force

Abundant high quality labor force supports the industry. Sixteen academic institutions provide
about 900 engineers per year and vocational secondary education provides 5,000 technicians.

Construction capability
South Korean shipyards demonstrate strong competitiveness in engineering, production, and
production management. In particular, solid basic engineering capability and wielding skills helps
accommodate customized design requests from clients.

Economies of scale
Total construction capacity of South Korean shipyard is two to seven times higher than its
competitors as of 2007. South Korean shipbuilders with huge docks are positioned well to keep up
with recent trend of increasing average size of ships.

Productivity
High productivity has been achieved by continuous production process improvement and
development of construction methods. Such innovative methods include product-mix method,
mega/giga/tera bock method, and the introduction of floating/T-type dock.

Product mix
South Korean shipyards have diversified their products with an emphasis on high value ship types
by virtue of huge construction capacity and high productivity. While bulk carrier of relatively low
value takes the major portion of new build order for Chinese and Japanese shipyards,
containership and LNG/LPG tankers account for more than half of South Korean shipbuilders
order backlogs.

Shipbuilding cluster
Most of shipyards, equipment suppliers, engineering firms, and education institutions are located
alongside the southeastern part of South Korea. Close relationship between academia and industry
in the region support reliable supply of high quality equipment and material as well as constant
development of technology.

26

4.2.3. Tough times

Shipping market downturn
The shipbuilding industry is highly cyclical (Ecorys, 2009) and demonstrates strong positive correlation
with shipping industry. When financial crisis hit the shipping market in 2008, the shipbuilding market also
received big blow. The BDI (Baltic Dry Index), one of major shipping market indicator plunged to 663
(94% drop) after its earlier peak of 11,793 in May 2008 (Bloomberg, 2015).
Since then, the market has been in recession with little hope for the recovery of high levels of activities
due to the huge supply-demand gap. The BDI stands at 610 as of June 6, 2015 (Bloomberg, 2015). Many
shipyards went bankrupt across the world, and South Korean players were no different. Nevertheless,
global shipbuilding capacity still far outweighs new shipbuilding orders, and competition among
shipbuilders is getting fierce.
Labor cost and quality
South Korean shipyards are losing their price competitiveness as labor costs in the country are continually
increasing. Concerns over the quality of the work force also add to fresh challenges for South Korea.
Many of the shipyards are heavily dependent on sub-contractors. While this can help increase labor
flexibility in the industry, whether the technical competence of the labor from sub-contractors is properly
managed through job training is being questioned (OECD, 2014).
Chinese shipyards
Backed by low labor cost and strong domestic demand, Chinese shipyards have boosted their shipbuilding
capacity and caught up South Korean players in terms of number of new shipbuilding orders. Chinese
shipyards have also been achieving significant technological development with a view to entering into
high value ship market. This makes them a serious threat to South Korean shipbuilders.

4.2.4. Transition into offshore segment

Big 3
There are currently 53 shipyards in South Korea as of 2013 (Koshipa, 2014). The biggest shipbuilders
among them are HHI (Hyundai Heavy Industries), SHI (Samsung Heavy Industries), and DSME (Daewoo
Shipbuilding and Marine Engineering), which are often referred to as the Big 3. Combined, the Big 3
account for more than half of total CGT (Compensated Gross Tonnage) of the South Korean industry.
27

Offshore project
South Korean shipbuilders have had many offshore project experiences, but most of these experiences
were limited to fabrication of relatively simple structures, such as steel jackets and hull of floating units.
After the financial crisis in 2008, the Big 3 have ventured into large scale offshore new build project in
earnest in an attempt to overcome the difficult time. They took aggressive marketing strategy and
managed to sweep offshore new build market.

FIGURE 4-7 FLOATING PRODUCTION UNITS MARKET SHARE 2005-2009 (KOSHIPA, 2011)
Accordingly, offshore projects come to account for an increasing share of the Big 3s total new order
intake. For the last three years offshore projects made up the majority of the new orders of the Big 3.

FIGURE 4-8 NEW ORDER INTAKE OF THE BIG 3 2012 TO 2014 (HAN, 2015)

28

Norwegian offshore experience

The details of NCS offshore projects (new build projects for production units and new concept drilling
units for NCS) awarded to the Big 3 shipyards are shown in Table 4-2.
Shipyard

SHI

Operator
/Owner

Contract

Price
Award
(Bil NOK)

Delivery

Kristin

Semi-Sub

Hull FC

0,48

2002

2004

BP Norge

Skarv

FPSO

Hull/Topside
FC

4,50

2007

2010

Statoil
Statoil

Gja
Valemon

Semi-Sub
Jacket

Hull FC
Topside EPC

0,90
2,30

2007
2011

2009
2014

Teekay
(BG Norge)

Knarr

FPSO

Hull/Topside
FC

6,50

2011

2014

Heidrun
Martin
Linge
CAT-J
sgard

FSU

1,50

2011

2015

Total Norge
Statoil
Statoil
Songa
(Statoil)
Songa
(Statoil)
Statoil
ENI Norge
HHI

Type

Statoil

Statoil

DSME

Field

Statoil
Statoil

Jacket

Topside EPC

8,13

2012

2016

2 Jack-up Rig
Semi-Sub

EPCI
Hull FC

8,45
0,55

2013
1998

2017
2000

CAT-D

2 Semi-Sub rig

EPCI

7,35

2011

2015

CAT-D

2 Semi-Sub rig

EPCI

7,15

2012

2015

Jacket

Topside EPC

6,10

2013

2016

FPSO

EPC

6,90

2010

2015

Spar

Deck/LQ EPC

6,50

2013

2016

Spar

Spar Hull EPC

4,00

2013

2016

Gina
Krog
Goliat
Aasta
Hansteen
Aasta
Hansteen

TABLE 4-2 NORWEGIAN OFFSHORE PROJECTS AWARDED TO BIG 3

(PRICE AT PROJECT AWARD, ASSUMING 6.5 NOK/USD)

4.2.5. New challenge from offshore business

Huge losses from offshore projects
A massive order intake of offshore projects after the financial crisis in 2008 has proven to be a poisoned
chalice for South Korean shipyards. From 2014, all of the Big 3 shipyards have suffered significant losses
and it was reported that the huge cost overruns from the offshore projects were to blame for the poor
financial performance. This came as a big surprise to the industry, which had high hopes that those

29

projects could help the shipbuilders survive the difficult market. Figure 4-9, Figure 4-10, and Figure 4-11
show the financial results of the Big 3 shipyard in South Korea from 2014 and onwards.

FIGURE 4-9 QUARTERLY FINANCIAL PERFORMANCE OF HHI (HHI, 2015)

FIGURE 4-10 QUARTERLY FINANCIAL PERFORMANCE OF SHI (SHI, 2015; KANG, 2015)

30

FIGURE 4-11 QUARTERLY FINANCIAL PERFORMANCE OF DSME

(DSME, 2015; FG, 2015; KANG, 2015)

FIGURE 4-12 UNBILLED ACCOUNT RECEIVABLE OF THE BIG 3 (HHI, 2015; SHI, 2015; DSME, 2015)
Unbilled account receivable of the Big 3 has been increasing continuously since 2011 (Figure 4-12) and
offshore projects have been known to account for a substantial portion of the amount as many of the
projects has reportedly experienced various disputes and significant delays. Recently much of this unbilled
31

account receivable amount for offshore projects has proven to be uncollectable, which resulted in a
significant increase of allowance for doubtful accounts and recognition of huge losses.
Most of the big scale offshore projects reportedly face significant losses. A notable example of such
projects is a new build project of a new concept platform installation, removal, and pipe-lay vessel
awarded to DSME. The project with a 600 million dollar budget reportedly underwent 500 million cost
overruns (Shin, 2014a).
Norwegian offshore projects also take their tolls on the South Korean shipyards. The Knarr FPSO project
of a 12 billion NOK budget (Norwegian Kroner) is reported to suffer 30% cost overrun up to 16 billion
NOK (Stangeland, 2015). Songa offshore, a Norwegian drilling contractor, also announced that project
cost of their new build project for four semi-submersible drilling rigs in South Korea also increased to 685
million USD per a rig from the initial budget of 565 million as well as 1 year delay (Songa, 2015). In the
meantime, the South Korean counterpart of Songa offshore reportedly has suffered 1 billion USD losses
for the same project alone (Kang, 2015). Many other on-going offshore projects, including Martin Linge
and Aasta Hansteen, are also allegedly known to suffer cost and schedule overruns.
Major causes to the loss
Major causes to the recent considerable loss of the Big 3 were analyzed by the South Korean shipbuilding
industry (Shin, 2014b).

Tough competition among the Big 3

The Big 3 South Korean shipbuilders compete fiercely to win offshore projects. The overheated
competition eventually reached a point where the companies underbid projects with considerable
discounts, which inevitably cause substantial losses afterward as the projects progress. The
competition also has pushed the shipyards to accept the heavy tail payment condition for new
contracts where substantial portion of the contract amount is payable at the delivery of the project.
For example, many new building contracts for MODUs (Mobile Offshore Drilling Units) awarded
in 2011 and 2012 to the Big 3 provide that 70% of the contract amount is to be paid at the end of
the projects. This results in negative working capital issues for the companies and weighs on their
cash flow management.

Local legislation and regulation

The industries failed to give sufficient consideration to local law and regulation of the countries
where the facilities were to be installed. This constitutes a high business risk in the locally
regulated nature of the offshore project. In particular, failure to assess a risk resulting from

32

varying local contents rules and HSE (Health, Safety, and Environment) regulations leads to a
huge unanticipated additional cost.

Excessive outsourcing
The shipyards have been very dependent on outsourcing to meet the increasing demand of work
force due to the growing number of offshore projects. This raises concerns over quality of the
projects and capability to transfer knowledge and experience within the shipyards organizations.

Insufficient engineering competency

Engineering competency of the shipyards is not enough to deal with numerous changes, an
inherent characteristic of offshore projects. This makes it difficult for the shipbuilders to
accurately estimate costs of the changes.

Grim market outlook

Because of the oil price collapse, many of offshore projects have been postponed by operators for a couple
of years or even indefinitely. This puts more pressure on South Korean shipyards that are already
struggling with low market demand and the loss from cost overrun issues. Cheon (2015d) notes that the
total value of new offshore projects to be awarded to the Big 3 in 2014 and 2015 would remain less than
half the value of the 2013 level as shown in Figure 4-13.

FIGURE 4-13 BIG 3S NEW ORDER INTAKE IN OFFSHORE SEGMENT (CHEON, 2015D)

33

This poses a serious challenge for the shipbuilders since the offshore projects account for substantial
portion of their total order intake (55% to 75%) during 2011 to 2013. Figure 4-14 presents the new order
intake trend of the Big 3.

FIGURE 4-14 BIG 3S NEW ORDER INTAKE IN SHIPBUILDING AND OFFSHORE SEGMENT (CHEON, 2015D)
Efforts to tackle the challenges
The South Korean shipyards have put a great deal of effort into tackling the new challenges in the difficult
market condition. In light of recent significant loss, industry wide business downsizing to improve
profitability seems unavoidable. Workforce reduction and product portfolio readjustment are required. In a
bid to increase engineering capacity, some of the shipbuilders have been attempting to make an
acquisition of engineering firms. They also set up new engineering offices in metropolitan areas to attract
more engineers. To better manage offshore projects, the shipyards have been developing new project
control systems customized to the projects. They recently have shifted their marketing focus to fabrication
(construction only) contracts from EPC contracts (the shipbuilder as a main EPC contractor) in order to
reduce contractual risks.

34

5.

Findings

This chapter presents the key contributory factors and describes how they play out and create problems
during project execution phase. While the challenges arising during Norwegian EPC project execution at
South Korean shipyards are attributed to many different elements, it is important to review the experiences
of the people involved in the projects and to consider the social phenomenon. Thus, the analysis of data
from the interviews and follow-up literature review conducted helps determine the key contributory
factors that may not otherwise have been apparent.

5.1.

Key Contributory Factors

Each of the key contributory factors presented in this chapter does not come into play in isolation. They
are closely interconnected with each other. It is essential to identify the relationship among the factors as
well as to take a holistic view in order to understand how they influence project performance.

5.1.1. Cultural Difference

5.1.1.1. How are they different?
Hofstedes five dimensions
The five dimensions of culture developed by Hofstede and Hofstede (2005) provides a useful tool to
illustrate the cultural difference between countries in different cultural clusters. Scores of each dimension
are graphically presented as Figure 5-1.
The comparison suggests some cultural contrasts between Norway and South Korea. On the power
distance dimension, Norway gets only 31 while South Korea has 60, which means that Norwegian society
is less hierarchical than South Korean society. The score in the second dimension, individualism, reveals
that Norway shows moderate individualism whereas South Korea exhibits very strong collectivism.
Concerning cultural dimension of masculinity, Norway scores only eight, which makes it the second most
feminist country after Sweden, suggesting that Norwegian people care more for life quality relative to
other countries. South Korea also stays within range of femininity, but its society is more driven by
competition as compared to Norway. Scores on uncertainty avoidance, the fourth dimension, suggest that
Norway is neutral in this dimension while South Korea shows very uncertainty avoiding tendency,

35

suggesting that South Koreans feel acutely threatened by ambiguity or unknown situations. The most
significant margin between the two countries, however, can be observed on the last dimension, i.e., long
term orientation. Norwegians take a normative approach, paying respect to tradition while seeking a quick
result. In contrast, South Koreans are extremely pragmatic, focusing on education to be prepared for
change, thus putting more value on steady growth in longer term.

FIGURE 5-1 COMPARISON BETWEEN NORWAY AND SOUTH KOREA

(HOFSTEDE AND HOFSTEDE, 2005)
Halls low-context/high-context approach
Norwegian culture stands in a sharp contrast to that of South Korea from the perspective of Halls lowcontext/high-context approach. Table 5-1 shows where countries are on the low-context/high-context scale.
The table shows that Norway has very low context culture, while Korea, which is classified as East Asian
country, belongs to extremely high context culture category.
Country
German speaking Switzerland
Germany
Austria
Norway
Sweden
Denmark
Netherland
USA

Low-Context
****
****
***
***
***
***
**
*

High-Context

36

France
United Kingdom
Italy / Spain
Russia
Middle East
Africa
South America
East Asia

*
**
***
***
****
****
****
****

TABLE 5-1 HALL'S LOW-CONTEXT/HIGH-CONTEXT APPROACH (ULVEN, 2004)

Need for alternative approach
Although Hofstedes cultural dimensions and Halls low-context/high-context approach are useful for
understanding the cultural differences between the countries, they are based on a Western philosophical
foundation and concentrate on highlighting the differences. Yum (1988) points out that there were
increasing concerns over use of such approaches to explain interpersonal relationships and communication
patterns in East Asia due to the frameworks potential cultural biases. In order to identify communication
characteristics in East Asia, it is of importance to go beyond such limitations of Western approaches to
capture essence of the philosophy in the Asian region which has had significant influence over how Asian
people interact (Yum, 1988).
5.1.1.2. Confucianism
Confucianism is a social and ethical philosophy concerning practical ethics in daily life (Chen and Chung,
1994) and as such is an important concept to understand when interpreting how people raised with this
philosophy interact. The Confucian heritage is shared by many East Asian countries including China,
South Korea, Japan, Taiwan, Hong Kong, Vietnam, and Singapore (Wiarda, 2013). The philosophy is
based on the teaching of ancient Chinese philosopher, Confucius (BC 551-479), who aimed to achieve
political stability and moral integrity of society by implementing order. According to Yum (1988), the
focus of Confucianism is on human nature where right conduct arises and yields proper human
relationships, which serves as a basis of social stability. Confucianism highlights the four Confucian
principles and certain aspects of human nature, which bring about the right conduct of people. These
principles directly relate to development of social relationships, a distinct characteristic of interpersonal
relationship patterns in East Asian Confucian societies in contrast to individualism in Western culture
(Yum, 1988).

37

Social relationships vs Individualism

Yum (1998) identifies the focus on social relationships in East Asia as the main difference to
individualism in the West, arguing that the Hofstedes individualism-collectivism dimension fails to
capture the main characteristics of the Confucianism. The study by Chinese Culture Connection (1987,
cited in Yum, 1988, p.375) finds that two main Confucian characteristics, reciprocity and proper
relationship, are not related to the Hofstedes approach. Yum (1988) indicates that, influenced by
Confucianism, in East Asia, the emphasis is on proper social relationships and their maintenance rather
than any abstract concern for a general collective body (p.375).
5.1.1.3. Confucian influence on interpersonal relationship
Yum (1988) describes five characteristics of interpersonal relationship as a result of Confucianism:
particularism, asymmetrical and reciprocal obligations, clear distinctions between in-groups and outgroups, use of informal intermediaries, and the overlap of personal and official business relationships.
Particularistic
There is no universal rule governing human relationships in Confucian society. Confucian ethics take a
relative and comparative approach rather than absolute one (Leonhard, 2009). In Confucian societies,
people differentially grade and regulate relationships according to the status of the persons involved and
the particular context (Yum, 1988, p.378). This suggests that people establish relationships by assigning
their counterpart a position higher or lower than their own as they recognize and acknowledge the
counterparts status. In general, factors like age, title, reputation, and gender, serve as basis of judging the
status of a person in Confucian society.
Particularism in Confucianism resulted in the development of a sophisticated code of conduct that can be
applied according to the relative status of the person in a certain situation but not for someone whose
status is not known. This entails that, in order to apply the code of conduct in accordance with the relative
relationship, people need to identify the status of their counterpart by asking age, position, or other
personal information.
Complying with such code of conduct is very important, in particular, when people deal with a person in a
higher position in the society where more formal and specific rules (making a bow, using honorifics, etc.)
are applied.
There are cases where people with same status (e.g., same age or title) form relationship. Still, such
relationships rarely occur, which ascribes a special meaning to such relationship. Particularism makes the
relationship among equal status distinctive, where the code of conduct is not strictly applied. This helps
38

lower the communication barrier among the people in the relationship and develop personal connections
more easily and quickly compared to other relationships.
Asymmetrical and reciprocally obligatory
Yum (1988) indicates that reciprocity is the core concept of Confucianism. People involved in a
relationship have sense of asymmetrical mutual indebtedness, which assigns different obligations to each
person. This asymmetry does not allow a give-and-take-equally approach to occur and calculations for
such is deemed to be violation of Confucian principal (Yum, 1988). This complementary interpersonal
characteristic helps the relationship last for long time. For example, when people eat out, it is generally
expected that elders or superiors pay the bill for younger folks or subordinates who pay respect to them in
return.
Clear distinction between in-group and out-group
People involved in the reciprocally obligatory relationship become dependent on each other by fulfilling
obligations assigned to each of them, which make long-term relationships possible. Strong bonds among
the group members arise by excluding other groups (Chen and Chung, 1994).
Use of informal intermediary
Clear distinctions between in-group and out-group members make the use of intermediary inevitable, and
such intermediaries are effective for initiating new relationships or resolving disputes between groups.
The intermediary belongs to the multiple of groups in question so that the groups can communicate
through the intermediary.
Overlap of personal (social) and official business (professional) relationships
Pure business transactions based on calculation of each others interests is perceived as potential violation
of Confucian principle of mutual faithfulness. The desire for mutual faithfulness has resulted in
development of strong preference to develop a personal relationship during a pure business transaction
(Chen and Chung, 1994). People prefer small and personal meetings, as opposed to big and formal
meeting, where they feel more comfortable and open so that personal relationship can be developed
relatively easily.
5.1.1.4. Confucian influence on communication
Yum (1988) states that communication patterns in Confucian societies are developed in a way that can
help build and maintain interpersonal relationships. Yum identified four general patterns: process

39

orientation, differentiated linguistic codes, an emphasis on indirect communication, and an emphasis on

the receiver and receiving.
Process orientation
In Confucian societies, communication focuses on developing social relationships. Communication is
considered an on-going process to build and maintain such relationships, which are constantly changing
and intended to persist for a long time (Yum, 1988). It requires continuous follow-up to maintain
relationships.
Differentiated linguistic codes
In particularistic interpersonal relationships, the relationship is differentiated in a relative and comparative
way according to social status, age, sex, title, and so on. This approach inevitably results in complex
categorization system for the relationships. Each of the relationship is considered to be distinct, and people
will take different communication approaches with one another based on the particular relationship. This
leads to use of very complicated honorific language in East Asia.
Emphasis on indirect communication
A preoccupation with social relationships in Confucian societies leads to the extensive use of indirect
communication. Indirect communication provides useful communication tools that can help save
participants face by helping avoid situation where loss of face can occur (Yum, 1988).
Emphasis on receiver and receiving
A process orientation of communication stresses the role of listeners or listening rather than that of the
speaker or speaking (Yum, 1988). The on-going process of communication and constant changing
relationships have the listener bear burden of correctly understanding and responding to what speakers say.
The use of indirect communication puts even more emphasis on listeners capability to appreciate clearly
what is said (Yum, 1988). This puts more value on sincere attitude of listeners towards speakers. It also
leads people to refrain from asking questions on the spot and to pretend to understand what is spoken by
the speaker even though they actually do not.
5.1.1.5. Confucian influence on organization
Using the insights of Yum (1988), we can better understand on how people in Confucian societies form
relationships and communicate. These insights can be also used to interpret how Confucianism affects
interpersonal relationships and communication within organizations.

40

Hierarchical structure
The nature of particularistic interpersonal relationships intensifies characteristics of linear relationships
and serves as a basis for the hierarchical structure of organizations. It places great emphasis on differences
in age, sex, length of service between different levels and assigns authority and responsibility based on the
differences. Thus, the distinction between levels in organizations is clearer than in less particularistic
societies. In hierarchical organizations, communication usually takes place in unilateral direction, i.e., topdown.
Explicit rule of communication
Because of the institutionalized differences and social distance between levels (e.g., management versus
workers), there are explicit communication rules in Confucian societies and their organizations (Chen and
Chung, 1994). Learning and practicing formal and specific code of conducts as well as differentiated
linguistic code are important to avoid miscommunication.
Reciprocally obligatory relationship
Because of the complementary relationship in Confucian organizations, the superior takes paternal care of
subordinates and provides knowledge and experience. Subordinates, in return, repay with loyalty and offer
obedience to their superiors. Combined with hierarchical relationships and use of explicit rules of
communication, reciprocally obligatory relationships regulate what subordinates are likely to say to their
superiors.
Frequent contact among member
The overlap of personal and official business relationships leads to frequent contact among organization
members. They seek opportunities to identify mutual interests, share personal information, and build trust
so that they can expand common understanding and reach consensus (Chen and Chung, 1994). To this end,
social activities and gathering after work hours are frequent.
Loyalty to organization
A clear distinction between in-group and out-group members promotes a strong sense of unity among
members and inspires high commitment to the organization. Chen and Chung (1994) indicate that the
strong sense of unity improves management-employee relationships and the organizations control system.
On the other hand, the organization in Confucian society is often found to be difficult for out-group
members to join the group because such loyalty is achieved by excluding others; thus, foreigners are rarely
received as genuine in-group members (Chen and Chung, 1994).
41

5.1.1.6. Communication between organizations

When two organizations have a meeting for the first time, each participant exchanges information to
allow for the identification of relative status so as to establish relationship. The information that counts
most in a business context is title of the people, which determines how the hierarchical levels among the
participants from the two companies should be established.

FIGURE 5-2 COMMUNICATION PATTERNS BETWEEN ORGANIZATION

Based on the relative difference in statuses and the situation, the two parties apply the proper codes of
conduct (including honorifics, etc.) and communication patterns. In general, the participants from the two
companies have the same hierarchical set-up in terms of titles and roles so that a person of a certain level
has his counterpart of the same position within the hierarchy. With this arrangement, as discussed in
5.1.1.3, the meeting can have benefit of having relationship between counterparts of same status (title or
level in this context); it is easier for people to interact and, thus, have smooth and effective communication
lines. A person in a higher level usually initiates and leads the discussion while lower levels remain
supporting their bosses. During and after a meeting, communication occurs primarily between persons in
the same level of the two organizations, and this helps them develop personal relationships relatively
easily and quickly. Figure 5-2 illustrates the hierarchical set up (gray box) of a meeting and primary
communication pattern (yellow dotted line) of a person.
5.1.1.7. Influence on South Korean shipyard industry
In general, South Korean shipyards demonstrate most of the communication characteristics presented
above. They have large, complex hierarchical organizations where very a formal code of conduct is used.
Seniors receive much respect from juniors based on their age, experience, and knowledge. Employees of

42

the shipyard have social gatherings frequently after work where they form consensus. It helps build strong
sense of we, which draws a clear line between their group and others.
How these Confucian influences affect the South Korean shipyard in particular will be further illustrated
in 5.2.2.
5.1.1.8. Confucian influence on attitude towards law and contract
Confucianism has significantly affected the way contracts are understood and interpreted. As discussed in
5.1.1.2, the goal of Confucianism is to achieve stability through implementing order. Confucius stressed
that, in order to build and maintain stability, people should remain in their social position, which is
identified in a relative and comparative manner, and fulfill their obligation assigned in line with the
position. This rigid social hierarchical structure leads to the development of a social relation concept that
puts the group ahead of individual. Such social structure emphasizes harmony to keep the society stable
and creates self-regulating environment to achieve this (Leonhard, 2009).
Negative view on law and contract
Emphasis on harmony and the individuals burden of fulfilling moral obligation discourages legal
proceedings to pursue an individuals interests (Pattison and Herron, 2003). In the event of dispute,
relying on interruption of legal system as stated in the written contract to settle the case is viewed as a
failure to resolve dispute in respectful way based on trust. Such an approach, hence, is considered to
damage the harmony within the group (Tanner, 1996 cited in Leonhard, 2009, p.10). This Confucian
approach leads to negative attitude towards law and contract (Leonhard, 2009).
True intention of a contract
For the high context culture, a correct understanding of the true intent of a contractual counterparty
requires an interpretation of wider range of economic and societal background of the contract. For
example, two parties in a Confucian society may assume that the both can make some profit, or no loss at
least, out of the new business by concluding the contract, and the general business environment will
remain stable enough to achieve the goal. These assumptions can also include fulfilling verbal promises
between the parties which are not reflected in the contract (Leonhard, 2009). Although the assumptions
are not clearly stated in the contract, the contextual background of the contract also counts as one of
important elements representing true intent of the contract.

43

Contract as an ongoing process of representing relationship

In Confucian societies, the written contract is not held in as high reverence as it is in Western societies.
Rather, in the same context as the process orientation of Confucian communication (see 5.1.1.4), the
contract is viewed as an on-going process of representing and describing, not regulating, the relationship.
From this perspective, the signing of contract is viewed as an action of initiating a relationship between
parties, not the critical process of concluding be-all-end-all document that should be upheld throughout the
relationship as Western societies tend to view them (Pattison and Herron, 2003).
Many examples for this view of contracts are found in Confucian countries. Pattison and Herron (2003)
indicate that in China a written contract is ignored frequently and considered nothing more than a mere
formality. Further, the content of a signed contract is deemed to be subject to change and renegotiation as
situations change because the contract is only a representation of existence of relationship (Pattison and
Herron, 2003). Hall and Hall (1987) also observe that Japanese also often requests a meeting for changes
after the contract is signed. While American businesses, for example, consider the signed contract a final,
legally binding, and stable element, a Japanese one expects changes to the contract as situation develops
and changes (Hall and Hall, 1987).
Implication for South Korean shipbuilding industry practice
Due to the international nature of the shipbuilding business, South Korean shipyards are very well
accustomed to international contracting practice. In general, they know how to negotiate a contract with
clients from all over the world and comply with it at least for shipbuilding contracts, which they are used
to. Nevertheless, it should be noted that the aforementioned characteristics of Confucian view on contracts
and law still have considerable influence over their contract management practice. The cultural effect is so
powerful that it survives almost half century of international business experience of the South Korean
industry. McConnaughay (2000) notes that in Japan, which has more than 100 years of experience with
Western legal system, the traditional values still have significant influence over their business practices.
Combined with rich negotiation experience of South Korean shipbuilding industry (see 5.1.2.4), this
Confucian influence contributes to contractual disputes with Western customers including Norwegian
operators.

44

5.1.2. Shipbuilding Industry Practice in South Korea

5.1.2.1. Functional organization structure
Although South Korean shipyards embraced some elements of project-oriented organization, most of them
have an organizational structure based on the functional organization principle. The organization is
divided into sub-units by function and specialty. Authority is assigned according to level of position in the
top-down hierarchical structure. Gardiner (2005) indicates characteristics of functional organization
structure as follows.
Deep structure
The functional structure is characterized by deep structure with many levels and, thus, a clear line of
authority. This reduces conflict of interest within the organization, and communication from top to down
occurs very efficiently.
Focus on control of functional units
The manager of each function has complete power over the unit, and this enables flexible resource
assignment. Thus, once decision is made, it is carried out promptly and effectively. Large resources of
technical expertise make the organization competitive for complex project.
Rigid boundary between functions
Gardiner (2005) also indicates that communication and coordination across functions is not efficient and
can be time consuming. Issues and concerns need to be brought up and carried through complex chains of
command, going through multiple, different functions and levels to be resolved. The deep structure of the
organization results in heavy politics among its members and makes it difficult for members to have a big
picture of the overall business.
Concentration of authority
Delegation of authority is rare; thus, the functional manager is occupied with a heavy workload, leading to
less work efficiency. Because its focus is on management and control of different functions, the functional
organization does not provide a point of contact for customers who has substantial authority to address the
customers issues effectively.

45

Implication for South Korean shipyard

Although many of features of the functional structure described above can be observed in South Korean
shipyards, the one with most significant influence over the organizations with respect to offshore project is
the rigid boundary between functional units. This hinders lateral communication across functions; thus,
cooperation between them requires special effort. In this organizational setup, project management
functions need more authority to be able to have substantial influence over other functions in order to
control resource and manage project. However, this rarely exists in South Korean shipyards due to the
rigid boundary and the sheer size of the shipyards where 50 to 70 projects are ongoing and competing
each other over limited resources. The boundary as a communication barrier also exists between
disciplines or teams within a functional unit and effectiveness of communication within the unit depends
on how much power the unit leader has over sub-units. How these characteristics influence South Korean
shipyards will be further illustrated in 5.2.2.
5.1.2.2. Lean production
High productivity has been known as one of success factors of South Korean shipbuilding industry.
Such high productivity was attributed to implementation of the Lean concept.

FIGURE 5-3 LABOR PRODUCTIVITY COMPARISON IN SHIPBUILDING INDUSTRY (ECORYS, 2009)

46

Lean concept
The Lean is a production concept that focuses on eliminating non-value-added inputs and processes
from production operation (Yusuf and Adeleye, 2002). Inputs can be anything from time, to material, or to
effort during the operation (Hassan and Kajiwara, 2013). For example, any activity or movement of
equipment or people that does not create value, such as idle time of equipment or idle material, should be
reduced. Principles of the Lean production includes standardization, one-piece flow, flow smoothing,
focus on eliminating waste, dedicated interim production line, and so forth (Liker and Lamb, 2000). Many
tools to implement Lean principles have been developed, such as Just-In-Time, Total Quality Management,
pull production, and group manufacturing (Yusuf and Adeleye, 2002).
Production process innovation
South Korean shipbuilders applied some of these principles into their production system. Moura and
Botter (2011) indicate that the South Korean shipyards strategies put emphasis on low cost, short build
cycle, and high quality with technical innovations. According to Bae, Lee, and Park (2009), South Korean
shipyards have increased turnover rate of the core assets for shipbuilding industry, such as dry-dock,
berths, and lifting equipment significantly, so as to reduce construction cycle through introduction of
series of innovative production process: product-mix method, floating dock, mega/giga/tera bock method,
T-type dock, and so on. These innovations contribute to reduction of waste, e.g., idle time of the main
production facility and idle material.
Construction- led organization
Yusuf and Adeleye (2002) also indicate that Lean production is process-focused approach. As discussed
above, South Korean shipyards have achieved high productivity through many innovative technical
improvements in production process. Most of these improvements were initiated and led by construction
management department. This department deals with practical production issues at work sites where new
innovative ideas come out and communicates with other functions to put the ideas into practice.
Due to fierce international competition, the profit margin of South Korean shipbuilding industry remains
relatively low even with such a huge scale (Bae, Lee, and Park, 2009). In light of that, for those shipyards
which already possess full basic engineering capability for commercial ships in particular, increase of
productivity is regarded as core competency that directly relates to higher profitability. This desire to
increase productivity has resulted in a management focus on improvement of productivity that requires the
construction management department to have substantial influence over the whole organization. The
construction department investigates production process issues and gives feedback to other functions so as
to develop new/enhanced production processes. For example, the engineering function takes inputs from
47

the construction department for a new design with improved productivity. During this process, the
contraction department plays important role to assess chance of productivity improvement, comes up with
solutions, brings it to other functions to develop the ideas, and ensures that the information is brought into
other functions in a correct manner.
Built in quality
The built in quality, one of Lean production approaches, aims to build something right the first time.
This approach helps reduce cost for inspection and correction during the production process while
maintaining high quality. Thus, the built in quality approach improves reliability of production system
with low defect rate and stable quality control.
In its nature, this approach results in more focus on how to prevent error or change. It makes it challenging
for the Lean production system to manage offshore projects, which entail many changes. Due to their
complexity and customized design, offshore projects inevitably come with many changes. Thus, such
projects require an emphasis on how to efficiently deal with changes as opposed to built in quality
approach of Lean production.
Tightly coupled production system
Lean production eventually leads to less flexibility. This favors productivity of South Korean shipyards
for shipbuilding business, but it does not help offshore business.
Lean production has its emphasis on minimizing waste by smoothing the flow of goods, and this affects
flexibility of a production system. Production systems are organized such that the goods proceed
continuously through the production processes without minimum waiting time. To this end, the production
processes are streamlined and tightly coupled, and this can translate into less flexibility, thus suggesting
that the high productivity comes at the cost of flexibility.
In tightly coupled processes, a change in one process can influence the whole production system as the
impact of the change is difficult to predict. A change in a local level can affect the entire production
process flow and eventually bring serious consequences for the entire shipyard. Again, smoothing flow of
goods in the Lean production concept is another factor that can slow progress of offshore project in the
shipyards.
Master-servant relationship
According to Yusuf and Adeleye (2002), the master-servant supply chain relationship is another
characteristics of Lean production. An entity that adds more value to the product has more control over the
48

supply chain (Yusuf and Adeleye, 2002). Thus, in Lean production, the Lean manufacturer (shipyard) has
a strong grip over a supply chain because it takes the lead of whole value creation processes. The Lean
manufacturer has substantial influence over its supplier by demanding them to comply with its
requirements for technical specifications and delivery conditions as required by its optimized production
system. The dynamics of this relationship tilts the balance of power toward the Lean manufacturer and
leads to the master-servant relationship that arises in the shipbuilding business in South Korea.
In offshore business, however, this is not the case. The equipment produced by suppliers in the offshore
sector is of much higher value than those in shipbuilding sector. Thus, the suppliers can have more control
over contract terms and conditions as reflected in this new relationship between the shipyard and suppliers.
Because South Korean shipyards are used to the master-servant relationship in a Lean production supply
chain, friction between the shipyards and suppliers in offshore business escalates.
5.1.2.3. Heavy reliance on local sub-contractor
Due to the labor-intensive nature of the shipbuilding business, labor costs account for a substantial portion
of production costs in the industry. In South Korea, wages make up 30% of total shipbuilding cost (Ecorys,
2009), and there has been increasing trend in the cost element. In order to retain its cost competitiveness
and increase labor flexibility, South Korean shipyards contract out extensive construction work within the
yard to local sub-contractors.
Dependency on local service provider
According to a report from the Korea Offshore and Shipbuilding Association (Koshipa, 2014), the number
of technicians/craftsmen from service sub-contractors for construction work within the yard has been
increasing continuously, and this trend turns out to be very significant in offshore projects in particular.
As shown in Figure 5-4, the total number of workers hired-in from sub-contractors for construction work
at South Korean shipyards surged from 19,321 to 114,167 (by 491%) between 1998 and 2013, while total
number of shipyard employees rose from 56,384 to 68,855 (by 22%) only during the same period.

49

Number of
employees
120,000
100,000
80,000
60,000
40,000
20,000
0
1996

1998
Admin.

2000

2002
Eng.

2004
Tech.

2006
Yard TTL

2008

2010

2012

2014

Sub-contractor

FIGURE 5-4 HEAD COUNT DEVELOPMENT OF SOUTH KOREAN SHIPBUILDING INDUSTRY

(KOSHIPA, 2014)
This trend also appears distinct in headcount development of offshore segment. From 2007, when Koshipa
started to collect data for offshore segment, to 2013, the number of hired-in workers from sub-contractors
escalated from 12,442 to 35,576 (by 186%). In the same period, number of shipyard employee increased
from 6,394 to 8,414 (by 32%) as shown in Figure 5-5.

50

Number of
employees
40,000

35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2006

2007
Admin.

2008

2009

Eng.

Tech.

2010

2011

Yard TTL

2012

2013

2014

Sub-contractor

FIGURE 5-5 HEADCOUNT DEVELOPMENT (OFFSHORE SEGMENT)

(KOSHIPA, 2014)
This significant disparity between the number of hired-in and a shipyards own personnel poses challenges
to control and quality of construction.
Control, quality, and experience transfer issue
Given that construction supervision is managed by shipyard engineer, the ratio of hired-in workers to
shipyard engineers indicates meaningful implications for labor control and quality management.

51

12.00
10.00
8.00
6.00
4.00
2.00
0.00
1996

1998

2000

2002
Ship

2004

2006

Offshore

2008

2010

2012

2014

Others

FIGURE 5-6 RATIO OF SUB-CONTRACTOR (TECH. & CRAFTS.) TO SHIPYARD ENGINEER

(KOSHIPA, 2014)
Figure 5-6 demonstrates that the ratio in shipbuilding segment dropped by 21% from 5.48 to 4.32 between
2007 and 2013, while in offshore segment it rose to 10.25 from 5.66 by 81%. In particular, the ratio in
offshore segment has spiked dramatically since 2011. These data indicate that the number of hired-in
workers in offshore segment supervised by one shipyard employee is almost 2.37 times more than that of
shipbuilding segment in 2013, assuming that field supervisor group accounts for same portion of total
number of shipyard engineers in both shipbuilding and offshore segments. The rate at which the ratio had
increased in offshore segment is also striking as compared with relatively modest increase in shipbuilding
segment.
This trend is attributed to the upsurge in number of offshore projects awarded to South Korean shipyards
since mid-late 2000s. The trend suggests that the shipbuilders have been addressing the abruptly
increasing labor demand mostly by bringing in more sub-contractors rather than increasing its own
employees. Consequences resulting from this trend seem obvious. Shipyards have tried to achieve its price
competitiveness at cost of increased quality risk. Rapidly increasing the number of workers inevitably
affects effectiveness of supervision adversely. Many interviewees pointed out that the sub-contractors are
not well-controlled by the shipyard and that their waste of resources is considerable.

52

As the labor demand in the shipbuilding industry surges, it becomes more difficult to find skilled workers
who are capable of understanding new requirements and performing up to the high standard of offshore
industries. Thus, concerns about the overall quality of construction work at the shipyards increase.
Another impact of the heavy reliance on sub-contractors is related to learning capability of the
organization. Because most of the construction work is carried out by sub-contractors who are highly
mobile, the permanent employees of the shipyard cannot fully capture the lessons learned through the
experience and cannot, therefore, transfer that learning from project to project within shipyard in efficient
manner.
5.1.2.4. Experienced negotiator
Over the course of navigating the tough and volatile shipbuilding market, South Korean shipyards have
developed seasoned negotiation skills. The fluctuating market affects the market sentiments quickly,
resulting in consistent changes of the balance of power between shipbuilders and ship owners. Shipyards
are very sensitive to such changes and respond promptly as the resulting consequences can be immense.
For example, in market down turns, ship owners often try to reject or delay the delivery of ships that are
ready to sail, citing issues that are actually minor and not enough for no-delivery. Challenges of this
kind come all at the same time, leading to long and difficult negotiations and legal proceedings. Thus, the
market conditions require the shipbuilder also be a skilled negotiator who knows when to be tough or nice.
The ship owner and shipbuilder continuously change their positions according to market developments. At
the same time, tough experiences make shipbuilding companies put a high value on long-term
relationships with reliable ship owners.
However, after the 2008 financial crises, when the dry bulk market index (BDI) plummeted by 94% in a
matter of 6 months, South Korean shipyards learned that even very well-established ship owners can go
out of business and that they may default on payment or refuse delivery. A number of lawsuits and
arbitration have made the shipbuilding companies cautious of their customers, even well-known ship
owners.
As the shipping market downturn hit South Korean shipyards, the shipyards came to take more costoriented approaches for new shipbuilding projects. This made them more sensitive to change order
requests, which can influence the cost level of projects and which deepened their already negative
attitudes (see 5.1.2.2).
The financial crisis accelerated the shipyards transition into a relatively new business area, i.e., offshore
oil and gas projects, and as they transitioned, they brought with them their skeptical views of project

53

owners and a heightened tight cost-oriented approach. These sentiments, combined with Confucian
perspectives on law and contract, affected Norwegian offshore project adversely.

5.1.3. Engineering Management

5.1.3.1. Lacking engineering competency
Insufficient engineering competency is one of the most serious issues commonly observed at all South
Korean shipyards. The problem prevents the shipyards from understanding technical complexity and
capturing totality of Norwegian offshore project. This poses a significant challenge for the shipbuilders to
work on offshore projects. It can be very dangerous to focus on specific technical issues based on previous
experiences, mostly about shipbuilding projects, without having a big picture of the new projects, which
require a good understanding of drawings/engineering data, functional specifications, codes/standards, and
laws/regulations.
Major contributors
Foregoing discussions on cultural difference and shipbuilding industry practice in 5.1.1 and 5.1.2
contribute to the fundamental causes to insufficient engineering competency of South Korean shipyards.
Interviewees indicated the causes as following:

Multi-disciplinary engineering function

Functional organization hinders cross disciplines communication and cooperation within
engineering function. For further discussion on this item can be found in 5.1.3.2.

Power distance
High power distances between levels resulting from hierarchical organization structure do not
help effective discussions between senior and junior engineers. In this organizational set-up,
senior engineers should be able to guide juniors properly, but this is not the case for offshore
projects because both the senior and junior do not have much experience. Even if a young
engineer completes training courses for the project recently and thus have more knowledge, it is
not easy for the junior to speak up her or his own opinion before seniors.

Less focus on quality management of engineering work

Quality management focuses on quality issues during construction phase and fails to give enough
consideration to the issues in engineering phase due to the shipyards emphasis on the
construction function in general. Interviewees pointed out that, for one of the shipbuilders,
engineering is not considered a part of the quality system, and the companys quality assurance
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manual is prepared for construction only. This results in quality issues not properly handled in
early phase of a project, i.e., the engineering phase. Hence, the issues are resolved in later stages
of a project, i.e., the construction and commissioning phases, and this costs more and causes
delays.

Lack of an engineering model

South Korean shipyards do not use a well-established engineering model for offshore projects that
defines sequence and maturity of information and the maturity needed to move on to next subphase of engineering work. Such a model would prove useful for a shipyard to monitor progress
of engineering phase and communicate it with a project owner. Without good engineering model,
however, the shipyards have difficulty documenting or proving recent progress and current status
of an engineering phase of a project. This eventually adversely affects project control functions of
the shipyards.

Risk analysis affected

Lack of engineering competency leads to poor risk analysis capability. Meticulous risk analysis is
essential to determine areas for engineering concern, assess consequences of technical issues, and
prioritize the issues. Weak risk analysis capability results in concerns over a capability to properly respond
to changes and to quality.
5.1.3.2. Multi-disciplinary engineering
Characteristics of process industry
The processing facilities make up a major part of offshore production platform topside, which is the main
deliverable of many EPC projects in South Korean shipyards.
The function of the facility is characterized by the use of hazardous chemical or biochemical reactions
under harsh weather conditions, and this leads to a strong focus of oil and gas industry on health, safety,
and the environment (REE, 1981). Among other features of the facility is a continuous flow of the oil and
gas processing work performed by groups of many complicated and sensitive pieces of equipment
interconnected each other (REE, 1981).
Multi-disciplinary engineering function
Design, construction, and operation of such a complex processing system require expertise in a wide range
of engineering disciplines including mechanical, hydraulic, pneumatic, electrical, and electronic domains.
Components of the system are closely inter-connected and cannot be treated in isolation. The complexity
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of the facility has resulted in a need for engineers who can take a systems approach and a holistic view on
the overall processing process and control. In order to develop such capabilities, engineers must
understand a wide range of engineering disciplines, i.e., multi-disciplinary engineering capability, rather
than exclusive knowledge in a certain discipline only. Rapid technological development in recent years
calls for even more emphasis on such multi-disciplinary engineering capability. Engineers are asked to use
newly developed technology to improve the process, while making the most out of existing proven
technology. On such occasions, multi-disciplinary engineers are expected to ensure that operations of the
system are not adversely affected by implementation of new technologies (REE, 1981).
Multi-disciplinary engineering also helps develop creative solutions for complex technical problems. King
(1995) indicates that fragmentation of disciplines can limit creativity of engineers because the high
specialism can narrow their perspectives, whereas multi-disciplinary engineering can broaden perspectives
and encourage cross-disciplines discussion, thereby promoting creativity and proving itself vital for design,
construction, operation, and maintenance of complex processing facilities.
Multi-disciplinary engineer
Special knowledge and experience in each of the single disciplines still plays a substantial role in dealing
with ever-increasing complexity of equipment and process used during processing. Specialists need to be
guided and advised properly of when and how to address such issues so that their job would not hinder the
processes of other components and the performance of the whole system would not be affected. Multidisciplinary engineers are to take such roles. They identify issues in the system and engage engineers from
various disciplines to deal with them. The engineers coordinate communication among different
disciplines to ensure the issues are resolved while maintaining the integrity of the system.
The roles of multi-disciplinary engineer are elaborated by REE (1981):

Deployment and training of process operation personnel,

Employees HSE (Health, Safety, Environment) issues,

Management of change during implementation of new or advanced technology, and

Management of interface between process system and construction organization.

Inter-disciplines check process

One of the important roles of engineering managers in an engineering unit is to ensure inter-disciplinary
check processes occur effectively and regularly. Engineering managers should set up an inter-disciplinary
team involving a number of engineers in relevant disciplines and establish procedures for the process. The
multi-disciplinary team reviews engineering documents and deliverables produced in a discipline level
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through the process. This process helps detect any clashes between disciplines including mechanical
penetrations. The reviewed information should be effectively communicated with construction and
procurement functions as well as sub-contractors to be implemented in construction phase.
3D modeling
The high complexity of processing systems demands the effective use of 3D modeling as well as multi
discipline engineers and inter-disciplinary check process. In a project of large scale, a number of discipline
engineers work concurrently (Biffl, Moser and Winkler, 2011) and can make local changes in a discipline
level unwittingly. Such changes invalidate connections between other disciples but are difficult to be
located promptly before they cause the problem. 3D modeling programs collect technical inputs and
present the data in an integrated 3D model that can be used to check potential problems or any type of
interface issues among different disciplines. Biffl, Moser, and Winkler (2011) point out that 3D modeling
programs provide significant benefits including increased product quality, less effort spent for defect
detection, and less rework cost.
No multi-disciplinary engineering culture in the shipyards
South Korean shipyards do not have a tradition of developing multi-disciplinary engineering functions. In
fact, there are rarely if ever positions for multi-disciplinary engineers in the shipyards project
management team (PMT) or engineering departments.
Upon acknowledgement of technical problem, a project engineer who serves as a multi-disciplinary
engineer in the PMT can readily refer the issue to relevant discipline engineers or call for a meeting for
cross discipline cooperation. Multi-disciplinary engineers also play an important role in the engineering
department. They are able to have a holistic view on the engineering aspect of the project and prioritize
the engineering tasks. Such engineers coordinate tasks between disciplines and get involved in the event
of discipline clash so as to facilitate the procedure and enhance quality of engineering work.
However, both the employee composition and organization structure of South Korean shipyards make
such fluid communication less likely. Communication barriers arise from the hierarchical and functional
organization structure of shipyards and may hinder discussion within a discipline and across different
disciplines. The high power distance between different levels dissuades low-level engineers from raising
their voices to note problems or offer solutions. Rigid boundaries between engineering disciplines also
obstruct efficient collaboration. In this organizational set-up, it is also difficult to expect an engineering
manager to have effective inter-discipline check process.
REE (1981) states that the development of multi-disciplinary skills and knowledge requires the following:
57

An education covering a range of relevant engineering disciplines,

Deep understanding of production process,

Systems thinking, and

Strong interpersonal and communication skills.

Most of the training provided by the shipyards focus on the development of specialism and do not focus
sufficiently on enhancing multi-disciplinary engineering.
Failure to use 3D modeling in proactive manner
South Korean shipyards in general do not actively use 3D modeling programs and fail to take full
advantage of it. A lot of changes in offshore project pose considerable technical challenges to EPC
contractors. The challenges of high technical complexity often require creative approaches and thorough
risk analysis, and for these things, using 3D modeling programs in proactive manner is key. 3D modeling,
if fully utilized, also plays an important role in assisting familiarization with installation condition and
allowing optimized material handling. Most South Korean shipyards miss out on these 3D modeling
benefits; thus, on many occasions, they spend a lot more time and resources reworking things or looking
for defects than they needed to.
5.1.3.3. Change and quality management issues
Technical changes matter
Changes during project execution comprise commercial/contractual changes, engineering changes, and
changes initiated by construction department while the department implements engineering work.
Although South Korean shipyards seem to handle commercial/contractual changes relatively well, their
capability to deal with engineering and construction changes is not satisfactory to Norwegian operators.
Change control system
South Korean shipyards have developed PCSs (Project Control Systems) for shipbuilding which
incorporates a system for change control. In its nature, a shipbuilding project is not so much dependent on
efficiency of change control system comparatively as it involves far fewer changes than an offshore
project. This enables the shipbuilders to predict to a certain degree where and when changes usually occur
in a shipbuilding project. This also leads to slim change control system with relatively low information
handling capacity.

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Based on the PCS designed for shipbuilding project, the shipbuilders have been developing a PCM for
offshore projects, but this new system does not seem to have enough capacity to handle many changes
occurring during an offshore project. The great number of changes brings on immense amount of
information to process and eventually overflows the change control system imbedded in PCS. The change
management process from change initiation to closeout is not properly registered or well-documented via
the system. This inevitably causes loss of information and results in poor traceability of change
information, and amounts to quality problems.
Because the change management process is not fully supported by the system, it is often handled manually
(use of email, smartphone messenger application, and phone call). This leaves the operator unassured of
the quality.
Insufficient engineering competency
Weak risk analysis capability of the shipyard hinders the ability to see changes early enough to better
manage them. Risk analysis should assess consequences of a change against cost, schedule, HSE
performance, economy performance, operability and maintainability, and provide technical solution for
the changes. However, it takes too much time for the shipyards engineering function to do so. Thus it
cannot produce such information and solutions in timely manner and often cause delay.
Tightly coupled production system
Low flexibility of closely interconnected production system does not allow interruption in the production
process because doing so could cause an adverse impact on operation of the whole system of a shipyard,
which may be managing 50 to 60 projects in parallel. Thus, the production system cannot afford any
delays in production, including the one resulting inevitably from a change that will usually need some
time to obtain a solution from the engineering function. Due to this uncertainty, the shipyard keeps
proceeding with the production process although it is aware of the change. As one of the interviewees
stated, the big train cannot be stopped. Still, this production pattern eventually puts more burden on the
offshore project as it requires additional cost and time for a rework to implement th solution for the
change afterwards.
Overloaded shipyard
High oil prices for last decade brought South Korean shipyards a number of offshore projects all at once.
All the Big 3 shipyards are overcrowded with 50 to 70 projects including several mega offshore projects,
each of which absorbs a significant portion of the shipyards resources. Although the shipyards have
increased their production capacity continuously, it is still not enough to accommodate all the big projects
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at the same time without trouble. There is a shortage of skilled workers, and employees of the shipyards
and local sub-contractors are overburdened with multiple tasks for multiple projects. The shipbuilders and
their local sub-contractors are overloaded, and PCSs of the shipyards are overflowed. It is unlikely that the
change control system will work in efficient manner practically.
Communication barriers
Engineering information flows through many stakeholders, i.e., long chain of different companies
comprising engineering sub-contractor, EPC contractor, oversea vendors, local engineering subcontractors, and local construction sub-contractors. Figure 5-7 illustrates the flow of the information.
Different line types denote efficiency of communication: solid lines mean very efficient communication,
dash lines mediocre, and dotted lines inefficient.

FIGURE 5-7 INFORMATION FLOW

As the engineering data goes back and forth, many different parties and functions are involved during
change process, and the communication lines among them are often crossed and confused. In particular,
for change control process, communication barriers between the different entities and their internal
functions hamper report of changes. For example, when the construction department realizes that a change
in a drawing is needed during construction phase, it should report the case back to engineering department,
which should provide a solution to construction department. However, the construction department may
find a solution on its own and implements it without discussing with the engineering department. Thus, it
does not adhere to change procedure and does not register relevant activities to change control system.
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Traceability of change data then becomes problematic. The communication barriers affect overall TQ
(technical query) and NCR (Non-Conformance Report) processes in general. These constitute serious
quality issues.
Effective implementation of solution by construction department
Once the solution for a change is provided, the construction department can resolve the issue in a very
efficient and effective manner. The shipyards emphasis on construction functions helps prompt and
accurate implementation of change.
5.1.3.4. NORSOK standard
The NORSOK standard is a functional regulation that contrasts with prescriptive regulation. Functional,
goal-oriented regulations describe what to be achieved, while prescriptive, descriptive ones provide how
to achieve the goal.
Prescriptive regulation
Before NORSOK was introduced in the 1990s, Norway used prescriptive regulations, which were a rather
stiff system offering specific details to be followed by the industry. The rules appeared to inefficient at
bringing technological development into practice while addressing risk associated with rapidly increasing
complexity (Kringen, 2014). The limitation of the prescriptive rules led to the introduction of more
flexible and systematic regulation.
Functional regulation
The functional standard emphasizes the ultimate objective to be accomplished. With adoption of these
standards, the industry is given more flexibility to use its experience and knowledge and to exercise its
discretion to determine how to reach the goal. The standard encourages creativity, enabling companies to
establish industry practice, develop new technologies, and cultivate continuous learning capabilities
(Skotnes and Engen, 2015). Still, the introduction of the goal-oriented approach also brought up issues
with interpretation.
Increasing complexity of HSE regime
HSE is the area which underlines the feature of NORSOK standard as a functional rule. A coordinated
effort made by the whole Norwegian petroleum industry to effectively address health, safety, and
environmental (HSE) issues contributed to establishment of the goal-oriented concept. According to a
report by Engen, Hagen, and Kringen (2013), the functional approach of the HSE movement also led to an

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increasing complexity that should be dealt with by all parties involved. The functional standards require
considerable knowledge and technical skill. It is difficult for small or new players in the industry to fully
utilize the flexibility given by the approach in order to identify and apply more advanced solutions.
Skotnes and Engen (2015, p.12) also point out that functional standards pose application and interpretation
challenges because they demand comprehensive and systematic review on how the various provisions are
to be understood and how the appropriate standards should be used to meet the requirements.
Implication for Norwegian EPC projects in South Korea
In the shipbuilding industry, prescriptive standards prevail, not functional ones, and South Korean
shipyards are no different. They have been developing their systems and knowledge based on approach of
command and control. Unlike functional standards, the prescriptive regulations do not require holistic
approaches. The rules are clearly stated, so they are easily read and comfortably followed.
As the shipbuilders came into the offshore business and landed Norwegian projects, including topside
construction projects, NORSOK standards became one of the difficult issues for them. The Koreans were
asked to take a systems approach that should be based on two critical elements.
First, in order to correctly interpret and apply the standard, shipyards need to understand how Norwegian
companies see the problem and deal with it. Knowledge and experience in Norwegian offshore industry
are very important in this regard. This view is evident in the case of HSE, the most critical domain in
offshore industry. The development of HSE regulations in NORSOK is based on inputs from offshore
operation experience. It has been difficult for shipbuilders to interpret the rules in consideration of such
particulars. Many of interviewees pinpointed working environment and technical safety as the most
challenging areas for Korean shipyards. These comments suggest how important it is for the industry to
understand Norwegian offshore industry practice in order to efficiently and effectively use NORSOK
standards.
The second element is a tool to analyze the problem and provide solutions. The NORSOK standards allow
users to exercise discretion to come up with new solutions with creativity for many challenges from
offshore project. Still, to fully utilize the flexibility provided by NORSOK, a tool to investigate issues
from different perspectives is essential. Multi-disciplinary engineering is one of such tools, but it is not
fully developed by the shipyards.

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5.1.4. EPC contract

5.1.4.1. Responsibility of EPC contractor
EPC contractors provide a single point of responsibility to deliver on the project on time and within
budget with required quality. EPC contract presumes that EPC contractors are experienced and
knowledgeable enough to deal with almost all risk shifted from operator. Thus, EPC contractors must have
a holistic view over the project covering all activities for core project functions: engineering, procurement,
construction, and project controls. Such experience and knowledge should be fully utilized during project
execution phase with the support of strong coordination and communication tools. As a lead interface
manager of project, the EPC contractor serves as a single hub connecting all relevant project participants
where all information is exchanged and decisions are made (Kaasen, 2009).
Challenges for South Korean shipyards
Given the discussions presented in this chapter and their implications on functional specialism and
interface management capability, it seems that EPC contract asks a great deal from the shipbuilders to
fully assume the responsibility as the main contractor. In particular, Norwegian EPC projects,
characterized by their NORSOK standards and high commitment to HSE, are more difficult for South
Korean shipyards to manage than other projects.
The core competitiveness of South Korean shipyards builds on their strong construction capability based
on high productivity. Their capabilities in other functions, i.e., engineering and procurement, are not up to
the level expected by Norwegian operators in general. Among areas for improvement regarding functional
capability are multi-disciplinary engineering capability, understanding of Norwegian regulations, technical
change process, and so on. The ability of the shipyards to take a holistic view over the whole work scope
of project is limited due to lack of such functional capacities.
The different communication and coordination tools that have been used by shipbuilders are found to be
less effective for Norwegian EPC projects. The differences in cultures (national level) and business
practices (industrial level) have significant influence over the EPC contractors interface management
capability. The interfaces among the operator, EPC contractor, and sub-contractors are not coordinated in
a way to contribute to the improvement of overall project performance. Rather, they disperse risk through
the network of project participants. In particular, the interface between EPC contractors and Western
vendors appears to be very challenging to manage. Lack of such functional capability leads to increasing
tension among project stakeholders and often results in situation where EPC contractors attempt to pass
some of their responsibilities on to their sub-contractors. The combination of the Confucian framework
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and insufficient functional capability comes into play and adversely affects communication between the
two parties (see 5.2.6).
Operator involvement issue
Because of the insufficient competences, many issues arise and become known to operator. Then the
operator feels incentivized to increase its influence and take more control in effect over the project with a
view to keeping the project risk in check. Baram (2005) indicates that even when an EPC contractor is
given freedom and flexibility to manage project, it is still bounded by operators requirements. The
researcher lists various ways operator can affect the freedom and flexibility of EPC contractor (Baram,
2005):

Operators requirements,

Variations vs changes,

Design approvals,

Schedule approvals,

AVL (approved vendor list), and

Operator provided items.

These items are often disputed to varying degrees between operators and contractors in EPC settings and
should, thus, be closely and carefully watched. As the operators involvement increases, the EPC
contractor becomes more reactive and responsive rather than proactive and preventive. At some point, the
EPC contractor comes to think that, as operator exerts more influence, the risk allocation structure of EPC
contract should also be re-organized. This approach seems to give grounds for EPC contractor to claim
that operator should share some of the project risk with the main contractor.
5.1.4.2. Norsk Total Kontrakt (NTK) 07
Norwegian standard contract for offshore construction project
Norwegian operators extensively use Norwegian standard contract conditions with relevant amendments
for the construction of offshore installations in NCS. A recent version of the standard contract documents
include NF 07 (for fabrication contract), NTK 07 (for EPC contract), NTK 07 MOD (for modification
contract), and NSC 05 (for subsea operation contract). These are results of long discussions between
Norwegian operators and contractors operating in NCS and the federation of Norwegian industries. Thus,
Norwegian standard contracts reflect comprehensive knowledge and experience of the Norwegian

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offshore oil and gas industry. One of main features of the standard contracts is the stringent formal rules,
which are exemplified by variation order (VO) regime.
Variation order regime
By their nature, a project goes through many changes and, in the case of EPC contracts, because of their
broad scope, the number of changes become even much larger. The VO regime in NTK 07 is designed to
deal with changes in an effective way and constitutes an essential part of the contract. The VO regime
operates as a mechanism regulating relationships between changes in the contractors obligations and the
resulting impact on project schedule and cost (Kaasen, 2009).
Variation is an alteration to the scope of work to be carried out by contractor as agreed to in the contract
and, thus, demands adjustments on the project schedule or cost. Sources of variation include design
change, variation from other contractors, new work scope, change in requirement, and so on.
Operators should issue a VO when they want to change an obligation of the contractor. The contractor
then becomes obligated to perform the work as stated in the VO without undue delay (NTK art. 15.1)
and informs the operator of an estimate of the work to be carried out for the variation. The obligation
imposed on contractor side to carry out such work is dubbed as Hoppeplikt in Norwegian.
If the contractor considers that the operator requested variation without issuing a VO, the contractor shall
issue variation order request (VOR) without undue delay (NTK 07 art. 16.1). If the contractor fails to
meet the time constraints, it loses the right to adjust the project cost and schedule.
Upon receipt of VOR, the operator can issue VO if it agrees on contractors opinion. If the operator does
not agree, it can issue a disputed variation order (DVO). The DVO has the same effect as a VO, and the
contractor shall perform the work according to DVO.
The disagreement on whether the work instructed by operator requires VO or how much impact the VO
has on project cost or schedule can be settled via expert decision, arbitration, or court proceeding. Still, if
the contractor does not commence such dispute resolution actions against the operator within a specific
time limit as stated in NTK 07, it will lose the right to the claim.
Formalism
The formal rules of procedure to handle VO described above represents strong formalism in Norwegian
standard contracts. Preclusive time limits offer a good example: the contractor loses its claim if it fails to
issue VOR within the time limit.

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Kaasen (2009) notes the practical benefits of the stringent preclusive rules. The rules facilitate clarification
of both parties position so that the impact of any dispute between them over project will be lessened. The
mechanism also helps the parties involved to renew the power balance between them if it is damaged in
the course of project. However, this formalism also often invites criticism. Critics question the fairness of
the preclusive rule mechanism in the contract format (Kaasen, 2009). For example, as described above, the
VO regime requires the contractor to perform the work instructed in the form of VO or DVO by the
operator even though the dispute between them is yet to be settled. This Hoppeplikt rule begs the
question of impartiality because it compels the contractor to relinquish its bargaining power. Another
criticism concerns the preclusive rules that deteriorate the spirit of cooperation among parties involved:
the stiff procedural rules make some parties of the agreement perceive the practice of such mechanism
antagonistic and contentious (Kaasen, 2009).
Implication for Norwegian EPC projects in South Korea
The criticism of formalism gives interesting implications for Norwegian EPC projects at South Korean
yards and cultural difference play important roles in this context. Negative attitudes towards contracts in
Confucianism (see 5.1.1.8) have considerable influence over contract management activities. Emphasis on
harmony lead South Koreans to perceive unfairness in the preclusive rules as violation of the Confucian
principle. The negative view of contracts in Confucian cultures hampers invoking the formal contractual
mechanism actively. The adverse impact resulting from the practice of the stringent formal procedure can,
coupled with this Confucian characteristic, make the contractual relationships even more vulnerable.
Kaasen (2009) contends that the potential risks of the formalism presented above do not pose much
challenge in consideration of practical situations where the Norwegian standard contracts are used. Such
situations assume that both parties are exceptionally experienced and have good understandings of the
mechanisms to use them efficiently (Kaasen, 2009). The assumption is valid for contracts involving
Norwegian companies only but may not so for international contract with players new to the standard
contracts. Kaasen (2009) observes that it also takes time for Norwegian companies to get accustomed to
the formalism of Norwegian standard contracts. As Norwegians become more familiar with the
characteristic of Norwegian stander contract, the sentiment against the formality gradually abates. This
means that the formal preclusive rules require some time even for Norwegians to get used to, and, in this
respect, it seems natural that it will take even more time for new player to well understand and practice the
formalistic mechanism.

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Change order in Shipbuilding contract

Offshore EPC and shipbuilding projects are of completely different in nature. Each of them has developed
contractual terms and conditions customized to their own needs. Perhaps it is not proper to make a direct
comparison between NTK 07 and commonly used shipbuilding contract forms (SAJ, AWES), as there are
so many significant differences. Still, it is worth noting how different they are, with respects to a specific
issue at least, in order to understand how a shipyard approaches a certain matter.
For the VO regime in in NTK 07, its counterpart in shipbuilding project is change order mechanism in
shipbuilding contract. The most significant difference between the two is that the instructed change in a
shipbuilding contract is not implemented before both ship owner and shipyard agree on its impact on
project schedule and cost. Thus, the shipyard is given substantial bargaining position.
This contrasts with the Hoppeplikt rule in NTK 07 and partly explains why shipyards are reluctant to
and do not want to follow the Hoppeplikt as stated in the EPC contract. Rather, they try to reach
settlement of the disagreement before performing the work according to VO/DVO.
Some other significant distinctions can be made between the NTK 07 and shipbuilding contract. As it is
beyond scope of this study to elaborate on such differences, only some of them are briefly described here.
For example, Norwegian law categorized as civil law family applies to NTK 07 while English common
law governs shipbuilding contract. This results in huge differences concerning the interpretation and
recognition of the liquidated damage and the penalty clause, which are considered one of the critical issues
in this field of study. The broad scope of work and high complexity of an offshore project lead to the
introduction of the Knock for Knock concept. The concept is not well known to the shipbuilding
industry in general. The differences between the two contract formats, including many others that are not
mentioned here, can serve as potential risk for the Norwegian EPC project at South Korean shipyard.

5.2.

Communication and Coordination Challenges

The four key contributory factors come into play as a project progresses. How those factors play out in
combination and challenges arise are illustrated here.

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5.2.1. Communication between Norwegian and Korean

5.2.1.1. Language barrier
It is not easy to convey exactly what one thinks to others even when two people speak the same language.
In international business, people with different first languages often communicate with each other in
English, regardless of what their first language may be. Thus, there can be a substantial loss of
information in the course of managing long-term projects involving countless meetings and
correspondences between parties with diverse linguistic backgrounds.
In general, employees of South Korean shipyards have basic competence in English. Personnel in
departments or teams that interact with customers frequently often use good English well enough to
handle detailed reasoning. Many in most technical disciplines or administration functions, however, have
less proficiency with English. Communication with South Korean local sub-contractors is even more
difficult because they are less involved in direct interaction with foreign customers, though younger
generations have relatively better English skills than older ones.
5.2.1.2. Cultural aspect: low context vs high context
From Halls low-context/high-context culture perspective, the cultural difference between Norway and
South Korea is significant (see 5.1.1.1). This poses a high risk potential for misunderstanding because
Norwegians attend more to the actual words spoken while South Koreans attend to the context in which
the conversation is taking place. There are many factors to consider when interpreting conversations in the
high-context culture of South Korea.
5.2.1.3. Confucian influence on interpersonal relationship (see 5.1.1.3)
Confucianism significantly affects the way South Koreans form relationships with others, and their
approach is noticeably different from Norwegians approach. South Koreans differentiate interpersonal
relationships based on the relative status of a person and the particular contextual backdrop. In this sort of
relationship, people follow particular codes of conduct that regulate interaction patterns based on the
relative position of each member. This particularistic approach applies rules to different people. This
approach contrasts with the universalistic approach in Norway. In line with its emphasis on the equality,
the individualistic value, Norwegians follow a generally accepted objective way to interact with people
irrespective of their potentially different status.
The asymmetrical and reciprocally obligatory characteristics of South Korean relationships are based on
mutual indebtedness, which assigns different obligations to each party according to their relative status.
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This reciprocal indebtedness also promotes long-term relationships. In Norway, however, relationships are
symmetrically obligatory and contractually reciprocal. People follow a general give-and-take interaction
principle. In these sorts of relationships, each party expects a pay-off reward that will be equivalent or
proportionate to what they offer the other party and that will be realized in a relatively short period of time
(Yum, 1988).
Unlike Norwegians, South Koreans tend to mix social and professional relationships. They interact
continuously and frequently to build a common understanding and have consensus within and outside of
the work place. Norwegians, in contrast, have a rather clear distinction between personal and official
business relationships. Overlap between the two does not typically happen.
The distinction between in-group and out-group members is clear in South Korea while it is rather unclear
in Norway.
Different way of building trust
The discussion above suggests that the way people establish and develop interpersonal relationships in the
two countries is different. The difference accordingly causes much confusion. In particular, the emphasis
on social relationships in South Korea is such that in order to establish and develop build trust for official
business one must first consider, and perhaps build, an interpersonal relationship. According to Yum
(1988), the Confucian focus on social relationships puts the development of human relationships even
ahead of official business activities, and this, in turn, results in a strong appetite among people to build
personal relationships during purely business transactions. Thus, for South Koreans, establishing and
developing social relationships are critical for building trust, and failure to establish the relationship in
proper way can lead to the disruption of professional business.
By establishing a relative relationship, South Koreans apply the Confucian asymmetric and reciprocally
obligatory rules of interaction to the relationship, which impose different types of burdens on each party.
Because the rules regulate the relationship and have some binding effect over the people involved, South
Koreans regard establishment of this relationship as an assurance of a certain level of trust. Thus, the
relationship is deemed to have a certain level of trust from its beginning, even without a process of gradual,
progressive development of the trust, which takes time. This suggests one of the most distinct
characteristics of how South Koreans build trust, which is very different from the Norwegian way. Based
on this mutual understanding, people can enhance the relationship and deepen the trust further.
It is difficult for Norwegians to appreciate the importance of establishing proper interpersonal relationship
in the manner typical of South Koreans because Norway has very different approach. In Norway, people
clearly separate social and professional matters; thus, personal relationships do not have much impact on
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trust in official business contexts. Norwegians establish relationships on equal terms and take general
symmetric give-and-take approach with each other. This means that delivering what one promises to
deliver is essential to build the trust in this relationship.
It is common knowledge that keeping commitment is critical to gain trust in any relationship, but what the
commitment means can vary across cultures and countries. The difference between individualism and
social relationship (collectivism) matters in this respect. Norwegians stress individualistic values, such as
autonomy of an individual, which requires an individual who pursues his or her own interests to carry his
or her own responsibility solely. It assumes that an individual is well aware of his or her capability and
authority so that he or she should promise what he or she can actually do. This supports that building trust
in Norway is result-oriented. South Koreans, on the other hand, recognize an individual as one of the
members constituting a group and put an emphasis on a role of the individual to keep harmony of a group.
To have a good understanding of capability and authority of an individual, it is necessary to draw a clear
line between the individual and the group, and this is difficult in social relationship (collectivism) culture.
It is also difficult to describe, to a large extent, how a group decides the capability and authority given to
an individual within organizations in South Korea. In this respect, South Koreans put focus on the
intention of his or her counterpart for a trust issue of a relationship. For example, even though a person
failed to deliver what she or he had promised, the failure would not necessarily have an adverse impact on
the trust level of the relationship between South Koreans. If delivery of the promise appears to harm the
harmony of the group and the intention of the person was to deliver what she or he said at the outset, a
South Korean expects her or his counterpart to accept these situations as reasonable grounds of not
keeping the promise.
5.2.1.4. Confucian influence on communication (see 5.1.1.4)
As discussed in 5.1.1.4, Confucianism has a significant impact on communication between people from
the two countries. Emphasis on indirect communication and the role of listeners, in particular, pose
challenges for Norwegians to understand what South Koreans try to convey.
South Koreans will use an indirect communication pattern to sidestep the danger of hurting a counterparts
feelings and reputation by addressing the difficult or sensitive issues in indirect ways. This, however, is in
stark contrast with Norwegians communication pattern, which tends to be more straightforward and
direct. Thus, South Koreans effort to save the reputation, or face, of her or his counterpart by slowly
approaching to heart of problem is not be appreciated by Norwegian. Norwegians may be confused by
indirect communications because such communication can be considered ruder or inconsiderate because it
is time-consuming and intentionally unclear. Thus, they may misinterpret the gesture. Similarly, South

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Koreans can misinterpret a Norwegians bluntness as lacking compassion for their face, though the
Norwegian was trying to get to the main idea in order for the other people to continue on.
Another thing that can cause miscommunication is silence. Recall that in Confucian communication styles,
the burden is on listeners to correctly understand what is said. This keeps South Koreans from asking
questions or speaking against what was said by a Norwegian client. In such cases, the Norwegian
presumes the South Korean understood or agreed with content, but this may not be true. The South Korean
may come back later with many questions about the same topic already discussed.
Yes in Confucian society may not be the yes in Western society
Among many examples where Norwegians struggle with the Confucian communication patterns is
interpretation of yes. For a Norwegian, a yes most likely means I agree with you or I agree to what
you want or recommend. However, in South Korea, yes can be interpreted in various way given the
high context nature of the culture. Yes can be an attempt to avoid saying no or being engaged in a
situations where disagreeing or rejecting an idea would threaten the other persons face. This is related to
the Confucian emphasis of indirect communication noted previously. Another interpretation of yes
relates to the previously discussed emphasis on listeners responsibility to maintain the conversation. In
this context, the South Koreans, who are typically listening, says yes to convey that they are sincerely
listening to what is being said by the speakers even though they are not actually following the contents of
the message. Language barriers, in addition to the cultural ones, also explain why this occurs here.
Because of the possible varying meanings of a South Koreans yes, Norwegians may believe that a
conversation ended differently than it actually did. People may not have actually come to agreement, and
this can lead to unexpected responses from South Koreans after official meetings. Namely, the South
Korean may later oppose or question what Norwegians think are already understood fully or agreed to.
5.2.1.5. Business practice
Business practices in both countries also have huge influence over the communication. Some of the
Norwegian business practices which South Korean recognizes distinct are presented in (INTSOK, 2014).

Positive note
Technically advanced
Sincere and honest
Practical
HSE focused
Standardization
Equality
Do not abuse of unequal
bargaining power

Negative note

Frequent and long vacations

Too direct and impolite
Too informal
Not clear/specific
Delay
Slow decision making process
Naive
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TABLE 5-2 NORWEGIAN BUSINESS PRACTICES OBSERVED BY SOUTH KOREAN (INTSOK, 2014)
These practices, particularly the items on the negative side, have practical implications for daily
communication at work. For example, South Koreans should plan ahead to obtain all the information they
need to work from their Norwegian counterpart before the Norwegian takes a long vacation.

5.2.2. Within EPC contractor

South Korean shipyards demonstrate most of communication characteristics influenced by both their
national culture, Confucianism, and the shipbuilding industry practice, as discussed in 5.1.1 and 5.1.2.
5.2.3.1. Confucianism
Among the Confucian influences over communication within organization of South Korean shipyards are
hierarchical structure, reciprocally obligatory relationship, overlap of personal and official business
transaction, and in-group/out-group distinction.
Hierarchical structure
In the hierarchical organization structure of South Korean shipyards, top-down communication occurs in a
very efficient and effective manner. Authority is concentrated to higher position. Once a decision is made,
it penetrates the whole organization instantly and is carried out instantly with the full support of the
organization. On the other hand, communication from lower level personnel to higher level is less
effective. Most of the shipbuilders have pre-established channels designed for bottom-up communication
which in general appear to be not working sufficiently.
Reciprocally obligatory relationship
A superior is supposed to provide guidance and parental care for a subordinate, and the subordinate is
loyal and pays respect to the superior. This helps smooth the transfer of experience and knowledge from
the superior to the subordinate and strengthen the bond between the two levels. The power distance
between levels is distinctive, stressing the difference in age, year of service, educational background, and
so on. This means that if the superior is not necessarily more knowledgeable or experienced than
subordinate, the reciprocally obligatory relationship principle cannot be sustained.
Overlap of personal and official business transaction
The shipyard employees interact with each other continuously and consistently so that they share much
public and personal information. This helps enhance the relationship among the employees. Frequent

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contact often entails the sacrifice of ones personal life. Social gatherings after work hours take place
much more frequently in South Korea relative to Norway.
In-group/out-group distinction
A clear distinction between shipyard and other groups helps strengthen ties among shipyard employees
and encourages loyalty to the shipyard. This promotes sense of unity. However, the loyalty comes at cost
of excluding others. This creates a huddle for the shipyard employees to build a cooperative relationship
with other companies where open discussion is necessary, e.g., joint ventures or consortiums.
5.2.3.2. Shipbuilding industry features
Functional structure (see 5.1.2.1)
The shipyard benefits from strong support from big groups of functional expertise. The deep professional
pool is a prerequisite for high productivity via innovating production processes. However, the rigid
boundaries between functional units hamper lateral communication. Each functional unit focuses on its
own tasks designated by the production system of the shipyard. Communication among functional units is
not well organized or supported by the system.
Lean production (see 5.1.2.2)
By implementing a Lean production concept throughout its production process, the shipyard achieved
high productivity and earned price competitive edge in international shipbuilding markets. Such
productivity comes at cost of flexibility. Production processes are tightly interconnected; thus, it is
difficult to estimate the impact of local changes on the whole system. The production system is not
designed to be resilient to changes.
Emphasis on high productivity has resulted in strong construction departments, which lead production
processes improvement initiatives. The strong power given to construction departments enables the
functional units to push the initiative through the organization. This results in an imbalance of power
between construction and other functions. Other departments are more receptive and reactive as compared
to construction departments.
Heavy reliance on local sub-contractor (see 5.1.2.3)
South Korean shipyards have been able to gain cost competitiveness by hiring in more sub-contractors.
However, such an approach increases concerns over the control of labor and quality of performance as the
number of sub-contractors supervised by shipyard employees has more than doubled since 2011.
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5.2.3.3. Works for shipbuilding project

The communication characteristics observed within South Korean shipyard organizations have proven to
be efficient and effective for shipbuilding business. With extensive experience in shipbuilding industry,
employees in the organization fully understand what they should do and how they should do it with the
support of optimized production system. Strong leadership helps the organization move forward for the
same target with a sense of unity. Within each functional unit, the employees have specialized knowledge
for their specific job and perform their tasks in a well pre-organized way. Streamlined production line for
shipbuilding process provides optimized tools for the task.
5.2.3.4. Challenges for offshore EPC project
Unlike shipbuilding projects, however, offshore EPC projects require a completely different approach,
which does not favor the communication characteristics of South Korean shipyards.
Ineffective bottom-up / lateral communication
High power distances and rigid boundaries make it difficult to have effective communication in upward
and lateral directions. To have support from other functions or share experience/information, the low level
engineer should bring her/his voice, through barriers of many different levels, up to the higher position
manager, who has authority over other functional units. If the manager with authority approves the low
level engineers idea, then the idea need to be, again, brought through multiple layers of different levels
down to low level of other functions.

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FIGURE 5-8 COMMUNICATION PATTERNS WITHIN SOUTH KOREAN EPC CONTRACTOR

Figure 5-8 illustrates the communication within the EPC contractors system. The green line type denotes
the level of communication efficiency: a solid line means very efficient communication, a dashed line
means mediocre, and a dotted line means inefficient.
The process of bringing an idea up from a low level of a functional unit to an upper level and taking it
back down to a low level in a different functional unit is too time-consuming and leads to wasting
resources in offshore projects, which often include high technical complexity and entail frequent changes.
Such challenges in offshore projects inevitably necessitate continuous discussions and cooperation across
functional units and disciplines to leverage the collective intelligence of the organization and come up
with creative solutions, and this cannot occur in efficient manner with the typical South Korean EPC
contractor communication pattern. The inefficient upward and lateral communication within the
organization is one of the most serious problems for the EPC contractor to cope with in order to manage
offshore projects successfully.
Project management function without authority
In this functional set-up, the project management organization cannot fully perform its task as expected by
the Norwegian operator. A PMTs voice is not strong enough to penetrate barriers between functional
units. Thus, the PMT of the shipyard operates as more like a facilitator or coordinator among different
functions rather than a project management team that actually leads the project with effective authority
over resource and influence over other functions.

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With its limited power, a South Korean shipyards project management organization cannot have control
over the construction and engineering departments which are more powerful and much larger than itself.
In particular, the construction department, which is the most influential unit of South Korean shipyard
organization, does what is the most beneficial for the entire shipyard, not for a specific project. Thus, a
PMT for any particular project does not have enough power to influence the decisions of the construction
department effectively. In fact, the role of a PMT is often limited, and each PMT competes with other
PMTs to attract more attention from the base organization of the EPC contractor so as to secure more
resources and support from functional units.
Haphazard project control
In situations such as the above, it is difficult for a PMT of South Korean shipyard to manage internal
communication efficiently within the organization. Due to insufficient resources, a PMT often struggles to
facilitate communication between functional units. For example, when discord or dispute arises between
construction and engineering department, a PMT should be able to mediate the issue. However, this seems
unlikely in South Korean shipyard because of the difficulty the PMT faces in keeping up with the schedule
and the technical communication that it needs to mediate between the two units. As a result, the project
scheduling and control of offshore projects are often haphazard in this functional organization because the
barrier among functional units hinders prompt exchange of information (Gardiner, 2005).

5.2.3. Interpretation of contractual relationship

5.2.3.5. Shipbuilding project
Application of Confucian framework
South Korean shipyards tend to construe contractual relationships between relevant parties through
Confucian framework where Confucian elements observed within organization come into play (see
5.1.1.5).
In shipbuilding projects, such an approach proves to be effective. According to the Confucian framework,
the project stakeholders form hierarchical relationships as shown in Figure 5-9, where the ship owner is
positioned at the top, shipyard in the middle, and local vendors and sub-contractors the bottom.

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In accordance with Confucian reciprocally obligatory relationship, shipyards (SY) pay respect to ship
owners (SO) while ask submission from local vendors (LV) and service sub-contractors (LS).

FIGURE 5-9 CONTRACTUAL RELATIONSHIP IN SHIPBUILDING PROJECT

Usually shipbuilding orders from a SO are placed repeatedly over a long period of time. This helps build
long term relationships. Such relationships are also established with LV and LS, who can be regarded as a
kind of big group comprised of many company members. The loyalty of the lowest levels (LVs and LSs)
to the SY is strong, and in return the SY proves that it can fulfill its Confucian reciprocal obligation as
superior by awarding more jobs and leading technology development initiatives involving LV/LS. Thus,
the notion of strong sense of in-group can be observed.
This framework works well. South Korean shipyards can satisfy any kind of requests from ship owners
because the shipyards have full capability within itself for engineering, procurement, and construction.
The biggest three shipyards have large in-house groups of experienced discipline engineers. A ship is
more standardized product as compared to offshore platform topside. This characteristic of the product has
helped shipyards develop Lean production systems where each of engineers can focuses only on his or her
specialty. Similarly, 85% of all equipment and material for ship are procured from local players (Bae, Lee
and Park, 2009). Thus, most of procurement activities take place within South Korea, where companies
share Confucian culture. Lastly, shipyards have excellent construction capabilities, thus completing South
Korean shipyards strong competitiveness in international shipbuilding market. And the same Confucian
framework approach was taken for offshore EPC project, but this turns out to be not the best solution.

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5.2.3.6. Offshore EPC project

Application of Confucian framework
Figure 5-10
illustrates the contractual relationship of Norwegian offshore EPC projects under a Confucian framework.
Application of this approach to overseas companies in offshore industry with different cultural

FIGURE 5-10 CONTRACTUAL RELATIONSHIP IN OFFSHORE EPC PROJECT

background gives rise to significant communication and coordination challenges.
Cultural Gray zone
In this setup, the South Korean shipyard, as an EPC contractor (C), pays respect to the Norwegian
operator (O). At the same time, C expects its sub-contractors (i.e., international engineering firms (E),
oversea vendors (V), and local service sub-contractors) to look up to itself as the local sub-contractors (L)
in shipbuilding projects would. However, this does not happen. Instead, as C becomes demanding to subcontractors, E and V, which are in most cases based on Western countries, are usually tough back to C.
Reciprocally obligatory relationships can be established only when both the superior and subordinate can
perform their own roles. In offshore projects, however, as project progresses, the key contributory factors
to EPC project challenges are brought into play and C cannot afford to fulfill such roles. According to
Confucianism, C should be able to perform its tasks as an EPC contractor in full without having to engage
O. This makes it difficult for C to report any important issues to O upon recognition of the problems. C
makes attempts to solve the issue without notifying O in a timely manner. If C fails to find solution,
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usually it is too late to implement corrective actions in the most efficient and effective way (INTSOK,
2014).
Usually E and V are equipped with extensive experience and knowledge in offshore industry while C still
has long way to go. Hence, it is practically impossible for C to provide guidance or advice as a superior to
its sub-contractors except local sub-contractors (L), which are in small number. L in general does not
possess much offshore experiences either. For FPSO, only 20% of total equipment and material are
provided by local players (Koshipa, 2011). In addition to these difficulties, the in-group/out-group
distinction is less clear in these projects than in shipbuilding ones, leading to more difficulties for C. For
instance, the ethnic diversity makes it difficult to draw a clear line between in-groups and out-groups.
Nonetheless, C has a tendency to regard the hierarchical structure of contractual relationship as a group
under Confucian thinking since it seems to them that the Confucian setup still binds all relevant parties
together.
All the above issues creates a gray zone in cultural the context between O and C (, see Figure 5-10), O
and E (), and O and V (), where communication among parties gets difficult. Combined with
insufficient functional and interface management capability (see 5.1.4.1), this cultural gray zone often
results in undesirable outcomes: C demands E/V take responsibility towards O; direct communication
between O and E take place excluding C.

5.2.4. Norwegian Operator

5.2.4.1. Confucian framework
Too much respect to the operator from the shipyard
According to a Confucian approach, the South Korean EPC contractor (C) pays respect to Norwegian
operator (O), but the high respect paid to O often appears to hamper efficient communication between
them. In general, C refrains itself from being assertive and speaking up particularly at the beginning of
projects. Issues arising as a project develops are not timely reported to and discussed with O. Thus, when
problems are known to O, it is often too late to find an optimal solution, and what is left for Os
consideration usually includes more expensive and less effective alternatives. Because C is reluctant to
have frequent dialogues with O and issues are not discussed timely, it is often the case that, when C
decides to have a meeting with O, the issues brought up to the table by C are too many to solve at a time.

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5.2.4.2. Different organization structure

Flat vs hierarchical
Norwegian companies are in general known to have a flat organization with low power distance, and this
is in stark contrast to South Korean companies. The Norwegian O expects C to have open discussions
across levels, but this does not happen effectively. The top-down communication pattern of C hampers
information flow in a bottom-up direction. For C, it is not clear who actually has authority to make a
decision within Os project organization. South Korean shipyards have a big and deep organization
structure. Thus, it is difficult for O to identify the person responsible for a specific task.
Project-based vs functional
The project-based structure of O contrasts with functional structure of C. Within functional organizations,
it is difficult to expect that a PMT has enough substantial influence over other functional units to hold a
strong grip on the project and provide an efficient formal communication line for O.
5.2.4.3. Ineffective formal communication line
In principle, every correspondence between O and C should occur via Cs PMT. However, combination of
difference in organizational set-up and lack of authority of Cs PMT makes the formal communication line
ineffective.
Different organizational structure
The different hierarchical set-ups among participants from O and C in formal meetings cause confusion.
Each party struggles to establish proper communication channels but uses different approaches to do so.
While C tries to identify relative hierarchical positions among Os participants and set up communication
channels between personnel at the same level, O focuses primarily on direct communication with Cs
participants according to their actual functions. The different approaches between the Norwegians and
South Koreans result in a time consuming meeting without a meaningful conclusion.
Power distance among participants
The high power distance among Cs participants of different levels also hinders free interactions. For
lower level personnel, it is difficult to speak up during the meeting, particularly if she or he is of an
opinion different from a higher level person present. This hampers open discussion, which is essential to
develop better ideas and to find creative solutions.

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PMT without power

Principal participants of such formal meetings from Cs side are members of Cs PMT. As the PMT is not
given enough authority (see 5.2.3.4), the meeting often appears to be ineffective because the PMT cannot
effectively deliver the meetings conclusion (e.g., agreed-upon next steps) to Cs functional units in its
base organization which actually carry out the work. The PMT must exert considerable follow-up effort to
get things done as agreed to during the meeting. Cs PMT needs to navigate the large base organization of
C and communicate the meetings outcomes in order to persuade its colleagues who have the actual
authority to perform the task.
Big size meeting
Formal meetings regulated by contract usually involve many participants from various departments. The
discussion often fails to get to the point and address practical issues with enough detail.
Inefficient and ineffective process
The combination of foregoing factors makes most of formal regular meetings inefficient and ineffective.
The problem solving process, even for a small issue, takes too much time and waiting when done through
formal meetings. Understandably, a big issue requires even more time and meetings. In some cases, it
seems that the repetition of this time-consuming and ineffective meeting has a cumulative effect of
exhausting Os project organization.
No response
It is quite common for the operators to have difficulty in dealing with their counterparts who do not
respond to requests or follow up on meeting outcomes. Lack of authority or power to handle the issue can
cause the shipyard personnel not respond in a timely manner. For certain types of big questions requiring
discussions among different departments, it usually takes some time for the shipyard to come back with a
firm answer due to its functional structure. Or it can be the case that the request from the operator fails to
draw enough attention from the shipyard personnel for various reasons including low trust level due to
poorly developed personal relationships.
5.2.4.4. Frequent use of informal communication line
The problematic formal communication naturally results in extensive use of informal communication lines.
As O becomes aware of the problem of the formal communication line, it takes an alternative route to get
things done.

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Direct communication with Cs base organization

O can identify the right person who has authority over Cs functional units or teams that handle an issue
relevant to Os project or that actually work on the issue first hand. Cs PMT can help O locate such
personnel so that O can have a small meeting with them. As discuss in 5.1.1.3, South Koreans are more
open and flexible in private settings. Thus, small informal meetings are more efficient and effective than
big formal meetings in general. Interviewees noted that small informal meetings are in extensive use to
address project issues in practice.
5.2.4.5. Further challenges
Difficult to locate a right person
Locating the right person to set up a direct communication channels appears to be very challenging for O.
In its hierarchical and functional organization nature, C has deep and wide organization structure, and this
makes Os searching process for the right person very time-consuming. O needs to go up and down the
hierarchical ladder to obtain information about the location of a right person in different functional units
or teams due to the rigid boundary between the units.
Frequent changes to who serves as the person in charge of a task also matter. As a general rule, a large
scale organizational and personnel reshuffle occurs every two or three years. However, it is often the case
that personnel for a certain position change more frequently; for a position in procurement department of a
shipyard change of personnel occurs even four times within a year, according to interviewees.
In some cases, even if a person in C knows where the right person is, she or he appears to be reluctant to
release it to O. Interviewees suggested two possible reasons. The strict boundary between functional units
and teams keeps people from engaging themselves in a controversial issue with other units or teams. In
particular, if the reason why O wants to contact a specific person is related to sensitive issues that can
cause trouble for other units or teams, people are unlikely to release contact information of the person in
question. They fear that they could be blamed by others in the organization for release of the information
if the direct communication between O and the target person can create problems. Thus, they withhold
information to avoid threatening the harmony of the organization.
Another possible reason concerns politics within C, one of disadvantage of hierarchical organization. A
manager of a unit or team may want to maintain a strong grip over her or his subordinates or colleagues by
having all the communication with O exclusively. This political motivation would keep the manager from
helping O by releasing the contact information and letting it contact the right person directly.

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Formalization issue
The frequent use of informal communication lines brings up an issue of formalizing discussion between O
and C. Because informal communication often takes place in private settings, it is difficult to record all the
details of the communication and to get it confirmed by both parties officially. This can be problematic if
the agreement made though an informal discussion is a sensitive commercial/contractual issue. Depending
on its nature and importance, some of the communication should be formalized and processed officially in
case of any potential dispute; however, this is difficult to do during communicating informally.
No response
Even with use of informal communication, O still has difficulties in dealing with some cases where Cs
personnel do not respond to conclusion made between O and C in the expected manner, in particular when
Cs personnel respond slowly or dont respond at all. There are many possible causes for this: the lack of
authority of the person who delivered the message or was involved in the negotiations, low priority
assigned to the issue or the project, general communication issues including language and cultural barrier
(see 5.2.1).
5.2.4.6. Tough contract management
In general, O and Cs attitude towards contract is very different, which is supported and strengthened by
their own experiences.
Because of Confucianism, the general attitude towards contracts is negative in South Korea (see 5.1.1.8),
and this is very different from Norways attitude. On top of this, the shipyards have grown skeptical
towards project owners and resistant to changes in general after financial crises (see 5.1.2.4). As discussed
in 5.1.4.2, stringent formality is one of major features of the NTK 07 format, which encourages involved
parties to actively utilize relevant clauses provided in the contract. Still, in the event of a dispute, the legal
proceeding usually comes at considerable cost and often does not justify such actions. And C, based on its
experiences that their requests for compensation for any changes are common and well accepted in
shipbuilding project, takes the same approach towards O, expecting that it is also effective for the
Norwegian EPC projects. This creates much tension between the two parties.

5.2.5. Engineering sub-contractor

In general, the engineering service is sub-contracted to an international engineering company (E), which
belongs to a different cultural cluster.

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Collision between high context cultures

Communication between C and E become difficult when E has high-context culture. Exchanging ideas
and information in a high-context culture requires more effort and time than in a low-context culture. In a
high-context culture, the listener should be able to correctly interpret the contextual message conveyed in
various ways in addition to the words and phrases spoken explicitly. Thus, if E has a high-context culture,
communication between C and E appears comparatively more challenging than C and O, which has a lowcontext culture.
Confucian framework
Given this cultural gap, the Confucian approach can make the already difficult interaction between C and
E even tougher. This can amount to serious interface management issues and disturb the smooth transition
of engineering output to procurement and construction.
Direct communication with Norwegian operator
In many cases, the engineering service is awarded to the company that carried out the FEED, one of
project development stages proceeding to the project execution. Even if this is not the case, usually E has
extensive international experiences; thus, there is a high chance of E already having established
communication channel with O. This gives E motivation to contact O directly while excluding C when
relationship between C and E stumbles. Once this happens, it may persist, making C feel marginalized and
causing C to pass more burdens to O.
Technical change process
In particular, when a technical change process is initiated, the stable and reliable correspondence between
C and E is essential. Miscommunication between them can do serious damage to the integrity of the
technical change management procedure and effectiveness of the complex feedback process involved.
Norwegian local engineering company
In many instances, E sub-contracts with local engineering firms in Norway for interpretation of NORSOK
standards. This adds one more link to the communication chain. It also requires more attention to be paid
to ensure smooth interactions between C and E and the Norwegian local engineering firm for efficient
implementation of already challenging NORSOK standards.

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5.2.6. Oversea vendors

Most of the major equipment in offshore EPC projects is supplied by oversea vendors (V) including many
Norwegian companies.
Confucian framework
Cultural friction takes place in the relationship between EPC contractor (C) and V too. C takes a
somewhat demanding position towards V as it does with South Korean local sub-contractors. According to
a report from INTSOK (2014), C can withhold the full contract amount if any dispute arises. The report
also reveals that, if there are serious issues between the two, V can be blacklisted by C, meaning that V
cannot supply its products to C. Applying the same Confucian rules to the relationship between V and Vs
sub-contractors, C does not understand why V cannot take full control over Vs subcontractors (INTSOK,
2014). Other common complaints from C include late responses from V in general, including late delivery
of LCI (Life Cycle Information) of equipment.
Lean production concept
As discussed in 5.1.2.2, the customer driven approach of the Lean production concept results in masterservant relationship in the supply chain. This skewed power relationship, combined with Confucian
approach, suggests Cs demanding attitude toward V.
NORSOK
Norwegian functional requirement is another important factor in this relationship. According to the
Confucian approach, C should be able to provide guidance to V, but in reality it is not the case as V has
better knowledge of and experience with NORSOK. This results in some occasions where Cs
procurement personnel make comments on Vs equipment and service without sufficient understanding
and knowledge about the relevant NORSOK requirement. V, thus, in many cases, finds such comments of
little value or to be impractical.
The interviewees noted that procurement function of C is generally regarded as being in the commercial
domain, and most of the related activities are handled by commercial personnel. However, this does not
help address many technical issues arising in the course of the procurement process. The equipment in
offshore projects require high technical integrity and compliance with tough regulations, thereby
demanding that engineers play more active parts in managing the procurement tasks rather than taking
only assistant roles. Still, in Cs organization, procurement is within the territory of commercial discipline.

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Engineering department is to assist procurement personnel but that is not good enough to achieve smooth
communication between C and V.
Interviewees also revealed that that often POs issued by C often miss out detailed technical specifications
with relevant reference to NORSOK standards, which are essential for V to produce their equipment. Such
POs lead to follow-up inquiries from V, which are followed by a great deal of correspondence between the
two parties to supplement the insufficient technical input in the PO.

5.2.7. Local service sub-contractor

South Korean local sub-contractors (L), who in most cases provide construction service, have close
relationships with C and exhibit strong loyalty to C in accordance with the Confucian framework.
Quality issue
Interviewees noted that by and large the overall quality of Ls service is good but to varying degree across
different South Korean shipyards. As discussed in 5.1.2.3, the number of Ls personnel working at Cs
construction area for offshore project has been almost tripled since 2007, while the number of Cs
technicians remains more or less the same level. This implies that the number of Ls personnel controlled
by one supervisor of C has increased significantly, and this inevitably leads to less coordination among
different Ls; thus, clashes take place. Consequently the overall quality of the service is adversely affected.
In most cases, L has developed its own work procedure and practice through extensive experience in many
ship construction projects. Ls adherence to its own procedure and practice makes it difficult for C and O
to ensure that L follows the procedure required by Norwegian regulations. Further, because C is
overloaded with so many projects, C comes to hire many Ls. As multiple layers of Ls are formed, the
communication within the hierarchical relationship becomes less effective in bringing messages from the
high level of C down to the low levels of L who actually execute the construction task.
All of above issues necessitate additional check and control activities to manage the quality of Ls service.
In particular, when a project is delayed due to Os (including Os other contractors) negligence or failure
of fulfilling its obligations, the project may become a low priority to C. This can result in poor quality of
Ls service afterward, as the skilled personnel will be reassigned to other projects with higher priority in
line with Cs interest.
Ambiguous hierarchical relationship
Many of Cs ex-employees are hired by L and come back to the workshops at the C. In such cases, the
previous positions and title the Ls workers had held at C can allow them higher status than Cs
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supervisors and complicate the relative relationship between C and L. If the Ls employee had
comparatively long work experience at C, it can be difficult for their supervisors from C to have effective
influence over the L. C, then, may call for the Os help to control their sub-contractors.

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6.

Recommendations

6.1.

How to approach the challenges?

The findings in Chapter 5 suggest that there is a significant difference between Norway (Offshore industry)
and South Korea (Shipbuilding industry). The first thing to do in order to mitigate the challenges arising
from Norwegian EPC projects in South Korea is to acknowledge and agree that there is such difference.
Both parties should then adjust their expectations of each other in light of the difference. Based on that,
what should be done and how it should be done can be determined to deal with the project challenges.

6.1.1. How different they are in relative terms

Table 6-1 presents the relative difference between Norway (Offshore industry) and South Korea
(Shipbuilding industry) in general as analyzed in this study.

National culture

Organization
structure

Industry

Norway

South Korea

(Offshore/Process industry)

(Shipbuilding industry)

Scandinavian culture
Individualism
Active towards law

Confucian culture
Harmony
Negative towards law

Flat
Lateral communication
Project-oriented
PM with substantial authority

Multi-disciplinary engineering
tradition
Functional requirement
Agile production (flexibility)
Focus on how to manage change
effectively
Focus on quality
(broad quality scope)
NTK 07 (Hoppeplikt)
Small size offshore yard
(2-3 offshore project in parallel)

Hierarchical
Top-down communication
Functional
PM as project coordinator

Deep expertise in a discipline tradition

Prescriptive requirement
Lean production (optimization)
Focus on how to minimize changes
Focus on productivity
(narrow quality scope)
Shipbuilding contract (change order)
Giant size shipyard
(15 offshore & 60 shipbuilding projects
in parallel)

TABLE 6-1 DIFFERENCE BETWEEN NORWAY AND SOUTH KOREA

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Although Table 6-1 provides useful guidance for Norwegian operators to identify the differences between
the countries (industries), there is more to take into consideration to determine the differences for an actual
business case, such as different corporate specific cultures, different work processes, and so on.

6.1.2. Alignment of expectations

6.1.1.1. Agreement on the difference between Norway and South Korea
Having identified the difference, both parties should acknowledge and take a same view on the difference.
Everyone involved in the Norwegian project in South Korea may agree that the two countries are different
in general, but at times they seem to disagree on how different they are. Establishing common ground on
the differences between the two is essential for better cooperation.
6.1.1.2. Assumption of similarity
Agreement on how different the two are is much more difficult than it may seem. Doing this requires
people to see beyond what they are used to, including even what they have thought was universal and
absolute. The tendency to assume similarities across cultures and countries is very powerful, and it takes
much time and efforts to be able to recognize the difference objectively. For example, according to
interviewees, Norwegians who come to South Korea first time presume the South Korean shipyards know
what the Norwegian operators know and try to compare the capability of South Korean shipyards to that
of Norwegian offshore yards. This is completely wrong consumptions and, as a result, the Norwegian get
surprised at first, then get mad, and get frustrated as one of interviewees described.
Even basic principles that are considered to apply to all projects can be challenged in the context of
managing Norwegian EPC projects in South Korea from many different perspectives including the
interpretation of the contract.
Interpretation of contract
Modern legal systems in most countries in the world are deeply influenced by Western society and have
many things in common. In particular, South Korea adopted a German civil law system from Japan, which
had adopted the German model. However, it does not necessarily mean that the way the law is interpreted
and accepted in South Korea is also the same as it is in Germany.
McConnaughay (2000) indicates that there is a fundamental difference in the role of law and contracts for
the commercial transactions between East Asia and Western world, and he called for rethinking the role of
law and contracts. One of the fundamental differences is based on the different recognition of
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individualistic notion of rights (Leonhard, 2009). The individualism in the Western world gives a person
or an entity freedom to engage in an agreement with others for his, her, or its own interest. In contrast, in a
Confucian society, the emphasis is on social relationships, thus restricting individuals freedoms while
putting more value on a harmony in the society. As discussed in 5.1.1.8, this provides ground for frequent
changes to contracts in Confucian countries, while contracts hold an absolute reverence in the Western
world.
Of course the Confucian approach can be hardly approved if any dispute is brought to the court in Norway
as NTK 07 format states. Still this does not sustain the expectation that South Korean shipyards will take
the same logical sequences in interpreting the contract as Norwegian counterparts do. McConnaughay
(2000) observes a significant gap between commercial law and commercial behavior across Asian
countries with traditional expectations often still strong regarding the subordination of law and contracts
to evolving circumstances and relational values.
6.1.1.3. Adjust expectation
The differences noted in Table 6-1 suggest that there can be an inevitable gap between Norwegian
operators and South Korean shipyards expectations. Basically, with the award of NCS project to South
Korean shipyards, Norwegian operators expect South Koreans to comply with Norwegian requirements
and contract terms through the multi-disciplinary and agile concept approach, which require flat and
project oriented organization. Norwegians may also want to have full support from the whole organization
of the contractor similar to what Norwegian offshore yards do. On the other hand, however, South Korean
counterparts anticipate delivering project with their already established systems designed for lean
production and utilization of deep expertise in a discipline, suitable for their hierarchical and functional
structure. Because a Norwegian project usually accounts for 2% to 3% of a business portfolio of South
Korean shipyards, it is natural that the shipyards view the project as one of its ordinary projects, and there
is a fierce competition to draw more attention from the shipyard between many projects going in parallel.
Based on the agreement of the difference, both companies can align their expectations of each other with
reality. For Norwegian operators, this requires a thorough review of the procurement strategy and their
own capability to handle the gap created by the difference. It is also important for the two companies to
have open discussions and a better understanding of the capability of their counterpart so that they can
have more realistic expectations. This is an essential process to improve effectiveness of the measures to
be taken in order to fill the gap.

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6.1.3. How to achieve the goal in different circumstance

Based on the agreement on how much gap is there between Norwegian and South Korean companies,
what should be done and how it should be done can be determined. For each of the many differences,
Norwegian operators can decide whether the difference is what it can accept or not. More specifically,
operators can divide the differences into three categories: differences that it cannot accept so that it should
maintain its own way; differences that it should and can accommodate from the shipyard and adapt itself
to the new environment; and differences that stand somewhere between the first two types of differences.
From the Norwegian operators perspective, the differences presented in Table 6-1 can be divided into the
three categories as shown in Table 6-2.
What to
accommodate

What to maintain

National
culture

Organization
structure

Industry

Scandinavian
culture
Individualism
Active towards
law

Confucian
Culture
Social
relationship
Negative
towards law

Flat
Lateral
communication
Project-oriented
PM with
substantial
authority

Hierarchical
Top-down
communication
Functional
PM as project
coordinator

Focus on
quality

What

Multi-disciplinary
engineering
Functional
requirement
Agile production
Focus on how to
manage change
effectively
NTK 07

Deep expertise in
a discipline
Prescriptive
requirement
Lean production
Focus on how to
minimize changes
Shipbuilding
contract

Where

How

TABLE 6-2 CLASSIFICATION OF DIFFERENCES

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How the differences are categorized is self-explanatory. National culture and organization structure cannot
be changed thus the difference should be acknowledged. On the other hand, the quality cannot be
compromised.
The three categories point to practical implications for Norwegian operators on how to approach
challenges in Norwegian EPC project at South Korean shipyards.

The What category refers to what to be achieved by the project and maintained by
Norwegian operators. The operators should clearly communicate the items falling into this
category to South Korean shipyards so that the shipyards fully appreciate the criticality of
such items.

The Where category refers to areas where operators should focus their efforts to narrow
the gap between the two parties. Operators supporting activities to reinforce shipyards
capability aim items in this category.

The How category refers to what operators need to accommodate. By adapting

themselves to different cultural and organizational environment, the operators can learn
how to communicate effectively, which facilitates and assists in supporting activities for
the areas identified in where category.

For practical application of this approach, depending on the project execution strategy, the operator may
conduct further analysis to determine more differences and add them into this categorization process. In
doing so, the process can yield more items for each category.
Norwegian is well positioned to adapt to new environment
Given its significant influence on human thinking and behavior, culture deserves more attention, and
Norwegian operators should reflect upon it before implementing the approach by accepting South Korean
culture. The difference between Norway and South Korea in how they communicate and establish
relationships is significant (see 5.2.1.3 and 5.2.1.4). In principle, both Norwegian operators and South
Korean shipyards should work together to overcome problems caused by differences in communication
and interpersonal relationship patterns so as to effectively address practical challenges arising from a
Norwegian EPC project in South Korea.
Still, the low-context nature of Scandinavian culture gives more of an edge to Norway to adapt itself to a
new environment relative to the high-context Confucian culture of South Korea. Because Norwegians do
not have the highly developed complicated rules for communications and relationships that South Koreans
live by, Norwegians can be more flexible when dealing with a completely different culture. The way
Norwegians communicate and build relationships is more universal, contrary to the particularistic South
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Korean way. This makes Norwegians more tolerant of others and, at the same time, acceptable by others.
Thus, Norwegian operators who play active roles to fill the gap between themselves and South Korean
shipyards are more likely to succeed in creating a successful partnership and completing their projects.
Common understanding is essential
In order to effectively address the project challenges, the two companies should establish a common
understanding about the determination of what, where and how. In doing so, Norwegian operator
can focus on the target areas identified in where category and the communication method determined in
how category so as to put its effort more efficiently to support shipyard activities and fill the gap
effectively. South Korean shipyard can facilitate this activity by lowering its communication barrier and
actively involved in the activities. A one-sided approach by the operator without the common
understanding may have some effect but to a limited extent at best. It is more likely that such an approach
would only increase the risk of misunderstanding between the two parties and further hurt the relationship.

6.2.

How to Communicate

The How category identified above implies that, in order to have effective communication and thereby
facilitate the activities to fill the gap between Norwegian operator and South Korean contractor, operators
need to adapt themselves to the different environments.

6.2.1. General communication in person

6.2.1.1. Understanding of different communication pattern
Knowledge of the Confucian influence on communication, personal relationships, and organizations helps
enhance understanding of how South Korean shipyards personnel communicate. It is advisable to educate
the Confucian influence to the operators employees before they are sent to South Korea. Most of the
interviewees pointed out that the training courses for cultural difference they took were not good enough
to provide practical implications for daily work. On the other hand, Norwegian operators may also inform
the shipyard of Norwegian culture and how it affects the way Norwegians communicate. Doing this helps
each party better understand its counterpart. Still, it may be difficult for Norwegians to follow South
Korean communication rules. As long as Norwegians can show South Koreans that they are aware of the
big difference between them and vice versa, the two can establish a common understanding that there is
always a high risk of misunderstanding and being misunderstood. Having this same understanding creates
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a relaxed atmosphere where people can open their minds and help reduce risk of miscommunication. This
is a good starting point for effective communication.
Be specific and clear
It is important to be specific and clear to lower general communication barrier. Using simple and accurate
words in a transparent way and taking pedagogical approach are advisable as there is always a risk of
misunderstanding due to different experience and professional terms used.
To steer clear of pitfalls of different communication patterns, including misinterpretation of Yes, it is
good to rephrase the questions and ascertain that all the relevant parties have the same understanding
clearly.
6.2.1.2. Know your position
The cultural gray zone
In the Confucian framework, the operator is positioned at the top of the hierarchy where contractors pay
respect to the operator and the operator is given authority over the contractors to certain extent. This helps
the operator have influence over the shipyards activities which can be utilized to help them fulfill its
responsibilities as an EPC contractor.
Notwithstanding such influence, the operator is still regarded as not in the same in-group but as a
foreigner. Employees of the operator are not required to follow Confucian rules while receiving respects
from the shipyard according to Confucian framework. This cultural gray zone effect provides the operator
with more flexibility regarding how to deliver its message to the shipyard. In general, following Confucian
rules, including being humble and respectful to counterpart, makes the communication easier. Still it is
worth noting that the operator can exercise some flexibility to go beyond the cultural boundary and take
different communication approaches where appropriate. For example, when the shipyard counterparts do
not respond to the operators request, operators personnel can use some strong words, such as you
should~ rather than can you~, to empower them to get what they need.
Being humble and respectful makes difference
Situated at the top of Confucian hierarchy, the operator can try to take full advantage of its position and
not show as much respect to the shipyard as the shipyard would do. Conversely, if the operator shows a
humble attitude towards South Korean shipyard, the shipyard greatly appreciates such demeanor, as it is
well aware of its position lower than the operator in Confucian hierarchy. The operators personnel could
make comments to shipyard without giving them an impression of being demanding. This can help
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operator make differences in various aspects in much easier way in the course of the project. It is also
advisable for the operators personnel to be polite to managers of shipyard. In doing so, the operator can
demonstrate its respect not only to its counterpart and his or her manager but also to the shipyard as a
whole.
6.2.1.3. How to establish relationship
According to the particularistic approach of Confucianism, South Koreans establish relative relationships
based on differences in status. The most influential factor that decides status assigned to people title. Age
comes next as the second most influential factor.
Take advantage of cultural gray zone
If a Confucian relative relationship involves a Norwegian as a customer, the relevant Confucian rules are
not strictly applied because the relationship falls within a cultural gray zone. This allows some flexibility.
Norwegians can choose either a Confucian way of establishing relative relationship or their own way of
building relationship on equal terms.
Confucian relative relationship
In establishing a relative relationship with South Korean shipyard personnel, employees of Norwegian
operators will be given status either higher than or equal to her or his South Korean counterpart. The
reason for this is that, under the Confucian framework, the Norwegian operator is positioned higher than
South Korean contractor because of the companies relationship to one another. According to interviewees,
the fact that there is usually not a significant difference in title between the two counterparts also increases
the likelihood that the Norwegian personnel will be assumed to have higher status than the South Korean
personnel.
South Korean shipyard employees have strong tastes to build a personal relationship through official
business (See 5.1.1.3). This suggests that a good personal relationship can be translated into a high level of
trust in an official business transaction. Hence, if well-cultivated, the relative relationship in the personal
level comes with many advantages in the organizational level that can help solve practical problems
effectively and swiftly. According to interviewees, a well-developed relationship can make a huge
difference and help improve the Norwegian project progress very successfully. Basically it lowers
communication barrier caused by lack of English competency and difference in status within Confucian
framework (too much respect to the operator). It can also help to secure high commitment to the project
from the shipyard management, obtain full support from the South Korean counterparts, ensure immediate
follow-up of requests for the operator, and so on. These are invaluable advantages for the Norwegian
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operator to better manage the projects in South Korean shipyards, where many projects owners compete
fiercely to draw more attention from the shipyard and secure resource for their project.
Professional relationship on equal terms
Relationships that are built on equal terms mean that Norwegians and South Koreans will define their
connections as just professional and official business relationships. This is an approach that Norwegians
are already familiar with. With this type of relationship, Norwegians do not have to worry about
seemingly complicated interpersonal relationship patterns of Confucianism. However, Norwegians are
less likely to experience the advantages that can be obtained by following a Confucian approach. On the
other hand, this approach can help Norwegians avoid the stress of managing new interpersonal skills and
rules. This sort of relationship is also becoming more acceptable in South Korea because South Korean
society is changing rapidly. Thus a relatively younger generation who grows concerned with
individualism is more susceptible to the professional relationship as Norwegians may expect.
6.2.1.4. Develop relationship and Build trust
How to develop relationship and build trust differs depending on how people establish the relationship. A
Norwegian operator can choose how to establish a relationship between a Confucian particularistic
approach (Relative relationship) and Norwegian universal approach (Relationship on equal terms). In
Confucian approach, a certain level of trust is deemed to exist among the people involved from the
beginning of the relationship (See 5.1.1.3). On the other hand, Norwegian builds trust from nothing at the
outset of a relationship. This section presents how the Norwegian employees can develop the Confucian
relative relationship and build trust with South Korean shipyard personnel.
Development of personal relationship is a key
As discussed 6.2.1.3, since a good personal relationship can lead to high trust level of official business
relationship, developing the relative relationship is a key to build trust between the two companies both in
personal and organizational level.
Although the Confucian asymmetric and reciprocally obligatory rules place a certain level of trust on the
relative relationship from its beginning, the rules do not insure the high trust relationship throughout the
project. The trust among the operator and shipyard becomes more dependent on how the relationship is
developed. South Korean shipyard employees develop a relationship through continuous and frequent
interactions due to overlap of social and professional relationship pattern in the Confucian society (See
5.1.1.5). They also have strong taste to build personal relationship through business transactions (See
5.1.1.3). These are useful tips for the operators employees to develop the relationship in particular when
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the relationship with their South Korean counterparts just started but also requires them sacrifice their
private life after work hours to some extent. Interviews suggest that spending time at social events with
the shipyard personnel and sharing personal matters is very important to lower communication barrier and
make the relationship more reliable. These kinds of social events serve as good opportunities to
understand what is going on in the shipyard and what their priority is for the time.
Being communicative, predictable, and reliable
Solely relying on development of a personal relationship to build trust is not enough to ensure high level
of trust in long term perspective. The fact that personal relationship can influence official business
transaction in Confucian society is also valid in reverse. Thus an effort to keeping a commitment as a
professional should come along with the activities for personal relationship development.
That is, as the project progresses, more general rules to develop trust in official business transaction apply:
be communicative, predictable, and reliable. Understanding how the shipyard personnel communicate and
willingness to adapt to new environment is a starting point to become communicative. The operators
personnel should inform their role and responsibility clearly to their counterparts. These are essential to
establish a solid foundation of trust and avoid potential misunderstanding resulting from different
expectations. When implementing certain requirements in the form of procedures or regulations in a daily
work, it is important to help the shipyard personnel understand why the requirement should be followed as
well as how it should be implemented. Once the rule or plan is set out, efforts should be made to adhere to
it, thereby enhancing predictability. The significance of making good on promises cannot be overstated.
Most importantly, each of operator personnel should be competent and reliable in handling tasks within
their specialty. High complexity of offshore projects brings up many challenging situations where the
operators experience and knowledge count. It helps not only solve a problems of the project but also
develop the relative relationship since the operator is expected to have better knowledge and experience
than the shipyard so as to provide proper guidance and effective solutions according to the Confucian rule.
Having professionals with the right competences is the most basic element to build and maintain trust.

6.2.2. Communication between organization

6.2.2.1. Formal communication line
Although a formal communication line regulated by contract is ineffective in general (see 5.2.4.3), the line
still serves as the official channel of communication where interactions between two companies can be
treated in due form. For certain kinds of subjects, including commercial, contractual, and other critical
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issues, the formal communication lines should be used to formalize and document relevant discussion
properly as these subjects, compared to others, entails higher potential of a legal dispute.
6.2.2.2. Informal communication line
Informal communication lines can be used for subjects that concern daily operation and require practical
approaches with an immediate effect as well as have less risk of developing into a legal dispute. Most of
practical issues which Norwegian operators face during a project execution phase is discussed and
addressed through informal communication. Growing importance of an informal communication lines
turns attention of Norwegian operators on how to develop interpersonal relationship with South Korean
shipyard personnel, which directly affect the effectiveness of the communication line.
6.2.2.3. How to locate a right person?
To make either formal or informal communication lines effective, it is important to identify a right person
and involve the person in the communication. Still it is a very challenging task for Norwegian operators
(see 5.2.4.5). The right persons include a manager who has the authority to handle the issues and
discipline level employees who actually works on the issues. If there are middle managers in-between,
they can also be included.
Establishing a good relationship with the shipyards PMT who can help identify the right person is a good
starting point. PMT can provide an organization chart of the shipyard. The chart often does not indicate
actual report/communication lines of the organization. It is advisable to find out the actual lines and draw
up another chart reflecting the findings. The operator should also continuously keep the chart updated with
a help from PMT as there are frequent changes of personnel within the shipyard organization.
In general it is convenient to start the search for a right person from a higher level of the hierarchical
structure of the shipyard. Meeting with manager level personnel of a functional unit handling the task in
question can help narrow down the search area as the operator goes down the hierarchical ladder.
6.2.2.4. Intermediary
Use of intermediary in line with Confucian relationship management practice (see 5.1.1.3) can help
establish the communication channels in an efficient way. An intermediary should have good
understanding of culture, organizational structure, and work process of both the operator and shipyard so
as to provide practical guidance to deal with cultural and organizational issues on how to communicate
and establish relationship.

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In the hierarchical organization of South Korean shipyards where authority is concentrated on the highest
position, a leadership change can lead to a massive scale organization and personnel reshuffle. Then the
operator needs to identify details of the changes to re-establish communication lines accordingly. The
process can take considerable time and effort for the operator to complete. The intermediate can assist in
re-establishing relationships with new management and important personnel of the shipyard quickly. This
also helps the operators employees manage relationship with personnel in lower levels.
Intermediary can also help solve practical issues with the shipyard by directly engaging in communication
between the two parties. Often it is the case that certain departments or units of the shipyards want to
communicate directly with the operators to solve problems but fail to do so due to the rigid boundaries
between functional units within the organizations. Intermediary can identify such needs of the departments
or units and help them set up appropriate direct communication channel with the operators. Still, care
should be exercised for this approach. In particular, use of intermediary to settle issues concerning
contractual or commercial subjects should be avoided. Those issues in general address sensitive topics and
can affect or question loyalty of the intermediary. In such case, use of intermediary can be
counterproductive and only damage relationship with the shipyard.

6.2.3. Formal communication line

A formal meeting, regulated by contract between Norwegian operators and South Korean shipyards, are
one of key formal communication lines. The effectiveness and efficiency of the meeting are dependent on
how the meeting participants prepare for, conduct, and follow-up on it.
6.2.4.1. Preparation for meeting
Determine agenda
First thing to prepare a formal meeting is to decide on an agenda that outlines what issues should be
discussed. The issues include outstanding and unclosed items carried forward from previous meetings. It
is a good idea to put a limit to the number of the issues. Attempting to address all issues in one session is
rather ambitious and does not help efficiency of a meeting. Once confirmed and listed up, the issues are
prioritized and, most importantly, shared with the meeting participants from the shipyard to prepare them
ready for relevant discussions.

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Decide what message to deliver

It is advisable to give enough specific thoughts to each of the issues, determine what the operators
position is and what the company expects from the shipyard in detail. In particular, if the operator wants to
create a solution, it is better to have sufficient internal discussions and develop ideas before a meeting so
that suggestions to solve the issue can be presented during the meeting with the shipyard. The formal big
size meeting is not a place where people can have free discussion to find practical solutions.
Plan how to deliver the message
Before the meeting, it should be agreed on, among the operator personnel, who will be a main contact
point for each issue and take care of relevant correspondence with the shipyard. Participants who take the
role of main contact point need to be able to demonstrate their authority over the relevant issue and ready
to respond queries from the shipyard.
Identify a right persons and ensure their attendance
According to the nature of the issues, the right persons from the shipyard should be identified. It is crucial
to ensure that the right personnel attend a meeting. This is the most important condition to be met for the
meeting to be effective.
Same set-up with shipyard
Once meeting participants from the shipyard are confirmed, the hierarchy among the shipyard participants
should be determined. Based on the hierarchical relationships identified, the operator can construct the
same hierarchical set-up among its own personnel attending the meeting. It is also a good idea to minimize
the number of participants of a meeting to improve its efficiency.
Know who is your peer at the meeting
While making hierarchical arrangement, each of operator personnel is assigned to a certain level which
corresponds with that of a shipyard person. The focus of communication during the meeting should be on
how effectively each of operator personnel communicates the agenda to her/his peer from the shipyard.
6.2.4.2. Conduct meeting
Mind levels among counterparts
Due to the high power distance between levels in the shipyard, managers in the high level among the
meeting participants speak up while low levels, by and large, remain to support the comments from their
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boss. If this is not the case and there are conflicts among shipyard participants, let them settle the issue so
that they can come out with one unified voice. Caution should be exercised when making comments on
such issues being disputed between the shipyard personnel, in particular when such comments can be
construed to be against opinion from high level personnel.
Deliver the same message clearly
The message should be delivered clearly through communication lines between the peers of the both
parties. All operator personnel should convey the same message to their counterpart. For each issue to be
discussed, the person who is designated as a main contact point needs to take a leading role in discussion
on behalf of the operator. Other colleagues remain supportive of the contact persons opinion. In doing so,
the operator clearly shows the participants from the shipyard who they have to contact in relation to the
specific issue. It helps simplify communication channels between the operator and shipyard and avoid
confusion arising from different organizational structure of the two companies.
Minute a meeting outcome
Throughout a meeting, either one of the parties should take notes of discussions. At the end of a meeting,
both parties agree on outcomes of the discussions they had. More specifically the outcomes include what
actions are to be taken by which party by when. The next meeting schedule can be also agreed. Based on
the agreed outcomes, the meeting minutes are produced shortly after the meeting and shared between the
two parties.
6.2.4.3. Follow-up meeting
Ensure a common understanding
The outcome of the meeting should be closely followed up by the main contact person in the operators
organization before the next meeting is held. The primary role of the contact person is to support her or his
counterparts in the shipyard to carry out the actions as agreed during the meeting. If there are any action
items which are not closed, the cases should be included in the agenda of the next meeting.
Make a report
The operator and shipyard can make a simple and short report in order to present what are the agreed
outcomes of the previous meeting and among them what are actually done. The report can help decide
agenda of the next meeting. Introduction of KPI (Key Performance Indicator) is recommendable to
measure the progress made after the meeting and keep the report simple.

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No response
The operator needs to find out the reason why the shipyard counterpart does not respond. Having a
discussion with the shipyard person in private setting is a good way to uncover more fundamental reasons
of the problem. If the shipyard personnel do not have enough authority to handle the case, the operators
personnel can support their counterpart to bring up the issue to higher level. It can be the case that the
shipyard person does not clearly understand what was told by the operator during a meeting for various
reasons including language barrier: the operators employee should ensure their counterparts understand
what the operator needs and why it needs that. The shipyard personnel may not feel that they need to work
on operators request immediately as they do not see the operators counterpart have power. In such case,
finding balance between using power distance within the shipyard organization and developing personal
relationship becomes critical as opting the former can adversely affect the latter. The operator personnel
can ask their boss to contact a manager of the shipyard person who does not respond and put some
pressure on the person in question.

6.3.

What to Support

6.3.1. Communication within EPC contractor

The rigid boundaries between functional units hinder cross-functional communication. The operator can
play a role in facilitating the cooperation among those units.
Construction and Engineering
Cooperation between the construction and the engineering department is crucial for smooth progress of
the project. In particular, the communication between low level personnel of the two departments is
important. They are the ones who actually work on the project, recognize problems, and initiate the
discussion. The operator may encourage the low level personnel in different functions to get together and
facilitate interaction among them. This can help early recognition of problems and efficient discussion
among the low level personnel across functions, thereby contributing to a better solution. Still, low level
personnel do not have enough authority to make decisions or take initiatives within the shipyard
organization. The operator can support low level engineers by communicating with managers who can
assign more resources and back up those engineers. If solving a problem requires involvement of even
higher level managers and the issue is important, the operator can help the low level personnel raise the
issue upward along the hierarchical structure. The operator needs to communicate the same message to the
102

managers positioned between the low level engineer and the high level manager who can make decision.
In doing so, the operator ensures that everyone in the decision making process chain has the same
understanding of the problem and, thus, facilitates discussions within the shipyard organization.
Sales and other functions
At the very early stage of project execution (or even before project award), the operator needs to ensure
that all the discussions it has had with sales department of the shipyard are shared with other functional
units of the organization which actually work on the project. It is often the case that the sales function
does not communicate some of the key elements negotiated and agreed upon with other functions, such as
construction and engineering. Thus, it is recommendable for the operator to verify if the communication
among the shipyard functions is effective enough to establish same understanding among all the functions
regarding what has been agreed with the operator. The operator may request the involvement of
construction and engineering department personnel in the negotiation process. One of the interviewees
noted that, on some occasions, some of sales department personnel, who get directly involved in the
negotiation and conclude the contract with operator, are engaged in the project execution phase at the
shipyard construction site. This helps facilitate communication between the operator and the shipyard and
reduce the risk of dispute resulting from miscommunication between the shipyard functions.

6.3.2. Communication between EPC contractor and sub-contractors

The operator should remain objective and neutral in relation to conflicts between the EPC contractor and
its sub-contractors so that it can play a role of a mediator.
Familiarization process
For the EPC contractor, it is important to understand how its sub-contractors work so that it can influence
its sub-contractor in effective way. According to interviewees, it is highly recommendable for the
contractor to spend several months from project start-up familiarizing itself with work process of its subcontractors. By having its employees in the work place of engineering sub-contractor and oversea vendors,
the EPC contractor can learn the products of the engineering sub-contractors and oversea vendors
respectively. This also helps the contractor understand how to influence those sub-contractors in a way
that they can take the EPC contractors work process and priorities into their deliverables, i.e. the detailed
design and equipment.

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Engineering sub-contractor
It is often the case that operator has already establish communication channel with the international
engineering sub-contractors, leading the sub-contractor to contact the operator directly when it has a
conflict with the EPC contractor. This does not help solve the problem. It will only make the shipyard feel
marginalized and take a more skeptical view of the relationship between the operator and engineering subcontractor. It is, thus, important to make the communication line transparent by involving the EPC
contractor in the discussion between the operator and the sub-contractor.
Oversea vendor
The operator can support procurement activities of the shipyard by backing its engineering capability.
Having engineers to support the shipyards procurement function helps produce technical inputs for the
purchase orders to be issued to overseas vendors. Such aid from operator also assists the shipyard function
in handling technical queries from overseas vendors efficiently.

6.3.3. Support EPC contractors engineering function

To deal with insufficient engineering competency of the South Korean shipyards, the operator is expected
to have extensive discussion and cooperation work with the shipyards, which requires more resources.
Strengthen engineering capacity within operators project organization
Interviews revealed that, as it stands now, the engineering capacity of the project organization of the
operators is not sufficient enough to help the shipyards fill the engineering capacity gap. Engineers in the
operators organization are already occupied by daily routine work and do not have enough resources to
support the shipyards in this respect. Within the operators project organization, it seems natural that most
of the important decisions made for the project concerns engineering issues given the significance of
technical challenges arising during project execution. Many of such decisions involve discussions between
the project director, project manager, and engineering manager. In particular, the engineering manager
provides valuable information that serves as a basis for the decision making process. Interviewees,
however, pointed out that the engineering manager is often so busy with many tasks that he cannot focus
on core issues including engineering support to shipyard. More assistants can relieve the engineering
manager of the heavy burden of administration work so that the manager can concentrate on critical
engineering items.

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Having more senior engineers in the project organization is also helpful. They can get involved in
communication with the engineering department of the shipyard directly to enhance the multi-disciplinary
engineering capability within the department.
Help the shipyards active use of 3D modeling
It appears that most of the Big 3 South Korean shipyards and their engineering sub-contractors use the
same 3D modeling software provided by a European company. For the operator it is also a good option to
bolster engineering capability of the shipyards by using the customer education program already run by
the 3D modeling software provider through its South Korean branch. In cooperation with the software
company, the operator can provide the shipyard with an education program customized to help the
shipyards actively use 3D modeling programs and apply it in practice for the offshore project.
Company
HHI
DSME
SHI

3D modeling software
Shipbuilding
Offshore
Shipbuilding
Offshore

Aveva Marine, PDMS

Aveva Marine, PDMS
Tribon Aveva Marine
Aveva Marine, PDMS

Offshore

Aveva Marine, PDMS

Sewha E&T (engineering sub-contractor)

Aveva Marine

DISEC (DSME subsidiary)

Tribon Aveva Marine

Sotec (SHI subsidiary)

Aveva Marine, PDMS

TABLE 6-3 3D MODELING SOFTWARE IN USE (ETRS, 2015)

105

7.

Discussion and Conclusion

7.1.

Overview of Results

7.1.1. Four key contributory factors

In an attempt to answer the first research question, this thesis identifies four major factors contributing
challenges during execution phase of Norwegian EPC project in South Korea.
Cultural difference
Confucianism is a dominant social and ethical philosophy in East Asian countries, including South Korea.
One of its distinct characteristics is social relationship, which contrasts significantly with individualism in
Western culture. The philosophy has had a great impact on communication patterns and personal
relationships, which in turn affected how organizations are structured and behaves. Five features of
communication within organizations in Confucian society are presented: hierarchical organization, explicit
rule of communication, reciprocally obligatory relationship, frequent contact among employees, and
loyalty to organization. Generally negative view on law and contract is also very different from Western.
Shipbuilding industry practice
The functional structure of shipyard has a deep structure where the focus is on control over functional
units. In this organizational set up, boundaries between functions are clear and rigid, and authority is
concentrated on higher position. Another characteristic of South Korean shipbuilding companies is the
Lean production concept. With the adoption of the concept, the shipbuilders have improved productivity
considerably, and the construction departments play an important role and have gained influence over
organizations. Such achievement comes at the expense of flexibility and has led to a rather rigid
arrangement in the supply chain. Heavy reliance on local service sub-contractors has been intensified for
recent years. It helps the shipyard maintain its cost competitiveness but, at the same time, raises concerns
over labor control and quality.
Engineering and quality management
Multi-disciplinary engineering function helps have holistic views over the system and is essential in
handling technical issues with high complexity. The shipyard does not have a multi-disciplinary
106

engineering tradition. It does not have positions for multi-disciplinary engineers and does not actively use
3D modeling although it has the modeling software. Interpretation of NORSOK standard is a difficult task
for the shipbuilders, who are used to prescriptive regulations. The functional regulation demands users
have experience and knowledge to take advantage of the approach fully. For those who do not possess
such virtues, the complexity of the standard will present serous interpretation and implement challenges.
EPC contract
As an EPC contractor, South Korean shipyards provide a single point of responsibility. Lack of full
functional capability required for EPC project and application of different communication and
coordination approaches make it difficult for the shipbuilder to fulfill its obligations as EPC contractor.
For those who do not have experience with Norwegian standard contracts, the stringent formality feature
of the NTK 07 format appears to be difficult to adapt to and to actively utilize. Combined with negative
attitudes towards contract in Confucianism, this can have adverse impact on contract management
between Norwegian operators and South Korean shipyards.

7.1.2. Communication and coordination challenges

For the second research question, this thesis describes how the key factors interplay and create
communication and coordination challenges among major project stakeholders.
General communication
Significant language barriers exist between Norwegian and South Korean stakeholders. The high-context
culture of South Korea is difficult to interpret correctly for Norwegians, who have a low-context culture.
Differences in business practices also hinder smooth communication.
Within EPC contractor
Confucian influences over organization and South Korean shipbuilding industry practices, identified as
key contributory factors, govern how the South Korean shipyard communicates and behaves.
Communications in bottom-up and horizontal directions are not effective within the shipyard organization.
The project management team of the shipbuilder does not have actual authority to manage the project, and
the team operates as formal communication channel. These makes the offshore EPC project challenging
for the shipyard.

107

Confucian framework
South Koreans apply the Confucian framework for interpretation of contractual relationships. Under the
framework, the shipyard as EPC contractor situated lower than Norwegian operator and higher than its
sub-contractors. Because the EPC contractor cannot fulfill its obligation against operator and its subcontractor according to Confucian reciprocally obligatory relationship, cultural gray zones are created.
Communication with Norwegian operator
According to the Confucian rule, EPC contractors pay respect to the operators, and this sometimes hinders
effective communication. Different organization structures lead both the operator and the EPC contractor
to have formal communication in effective way. As formal communication channel does not work well,
but communication in informal manner takes place extensively.
Communication with sub-contractors
Interviewees revealed that the EPC contractors are demanding of their sub-contractors in general in
Confucian framework, and this is generally strongly opposed by overseas sub-contractors. It is also noted
by interviewees that international engineering contractors have communication issues with EPC
contractors. The friction created between high-context cultures seem to contribute to the issue. The
engineering firm often already has direct communication line with the Norwegian operator, and this can
lead to worsened communication problems with the EPC contractor. Because of the challenges the EPC
contractor has in relation to interpretation of NORSOK, its procurement department fails to provide full
engineering input for the PO. The Norwegian vendors find it time-consuming to obtain all the technical
information they need for their products.

7.1.3. Recommendation
Based on the findings, this thesis makes recommendations for Norwegian operators on how to approach
and address the challenges arising during project execution phase of Norwegian EPC project in South
Korea.
Alignment of expectation
To address challenges, it is critical for the both parties to agree on how different they are and on how they
are going to resolve issues. Without such common understanding, it is difficult to expect efforts by either
of the two be successful.

108

More involvement of operator

Given the Confucian framework, the operator needs to take initiatives to implement any solutions. As it
stands at the top of the hierarchy, the operator can have substantial influence over the shipyard much
easier than those who are situated lower.
What to maintain
The operator needs to communicate to the shipyard clearly what it should maintain throughout the project
execution so that the contractor can understand the significance of it.
How to communicate
To support the shipyard in effective way, the operator needs to communicate effectively. Understanding
the differences in communication patterns and its own position under the Confucian framework is the
operators first step to having good interactions. Formal meetings between the operator and the shipyard
are not efficient in general. A series of preparatory work can help enhance the effectiveness of the meeting:
ensuring attendance of key personnel, having same set-up with shipyard, and planning how to deliver
messages. While conducting meeting, it is important to mind levels among the participants from shipyard
and deliver the same message to each of the participants in every level.
What to support
The operator can help effective communication between different functional units within the shipyard by
requiring the different functional units have a common understanding of the project and facilitating
discussions between low level engineers. The operator should also try to make the communication it has
with other sub-contractors transparent and serve as mediator between the EPC and its sub-contractors for
any conflict. It is also important to reinforce the engineering capacity within its project organization. In
the current set-up, engineering resources are not enough to support the shipyards in handling challenges
resulting from lack of multi-disciplinary function and insufficient experience with the NORSOK standards.

7.2.

Suggestions for Future Study

This thesis targets Norwegian oil and gas industry players. Thus, it assumes that readers are familiar with
Norwegian culture, business practice, and Norwegian oil and gas industry and focuses on introducing
South Korean culture and shipbuilding industry practice. Future research can put its focus on Norwegian

109

culture and oil and gas industry so that more precise comparisons between the two countries and industries
can be made.
Customers of South Korean shipyard include almost all of the big oil and gas companies in the world
including major NOCs (National Oil Company) and IOC (International Oil Companies). Many of them
also awarded EPC projects to the shipbuilders. One statement that came from South Korean shipbuilders
is that Norway has some of the toughest clients who can be hard to deal with as compared with other
clients. Comparisons between EPC projects from Norway and other countries can reveal what makes
Norwegian operators distinct from others.
South Korean shipyards also recognized that there are serious challenges for Norwegian EPC project. In
an attempt to address the challenges, they are making various efforts including increasing engineering
capacity by acquiring engineering companies and enhancing understanding of NORSOK standards by
initiation of dedicated task force team activities. Additional research on such efforts can touch on how
effective and successful such efforts are in terms of closing the gap between the Norwegian operator and
South Korean shipyard.

7.3.

Challenges

Data collection through interviews is very time consuming in this research. Interviews were conducted in
five different cities in Norway and South Korea. With a view to including various perspectives of different
project stake holders, the researcher contacted approximately 25 companies and obtain consent for
interviews from 13 of them. This is followed by considerable amount of correspondence between the
researcher and the companies to arrange meetings for interviews. As most of the interviews were
conducted outside the town, the researcher made frequent trips to other regions. Thus, considerable time
and effort was spent on administrational activities. To comply with the time constraint put on this study,
the researcher chose to facilitate the study activity by simplifying data analysis process and spending less
time for idea development.
Some of the companies, which were asked to have interviews, rejected interviews on the ground that they
do not have any issues with Norwegian EPC projects at South Korean shipyards. However, in the
researchers view, they seem very concerned about any unexpected consequences which may result from
this study even offered anonymity. For some of the companies, which were sub-contractors, their
experiences concerning Confucian hierarchical framework, where sub-contractors are subject to the EPC
contractors demanding attitude, may affect their responses. For others, which were operators, they

110

seemed to reject interviews as they were known to have serious issues with their on-going projects at
South Korean shipyard.

111

8.

Conclusion

This thesis concludes that there are four key contributory factors to challenges arising from EPC project
awarded by Norwegian operators to South Korean shipyards. Each of the factors is closely connected with
each other and gives a rise to the projects challenges together. In particular, this thesis reveals that the
differences in national culture and industry practice have a significant influence over communication and
coordination pattern in the project. Such differences, in combination with other two factors, relate to
almost every element constituting the challenges.
Identification of the key factors and how they play out has practical implications for management of EPC
project involving Norwegian operators, South Korean shipyards, and international sub-contractors. Based
on the analysis of its findings, this thesis provides practical advice for Norwegian players on how to
approach and tackle the challenges occurring during execution of their projects. In particular, it argues that
it is of critical importance to have common understanding of how different Norwegian operators and
South Korean shipyards are.
In all, this thesis concludes that the four key contributory factors provides an insight for Norwegian
companies to address the challenges arising from project execution phase of Norwegian EPC project in
South Korean shipyard.

112

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Appendix A
Interview protocol

1. Introduction

a. Welcoming
Nice to meet you and thank you so much for participating in my study.

b. Propose of interview
The purpose of this interview is to ask you to reflect on your work experiences with South
Korean EPC contractor. I want to hear your opinions about challenges arising during project
execution phase of Norwegian EPC project.

c.

Who I am
I am in a master course of offshore technology at University of Stavanger. I want to develop this
study as my master thesis.

d. Letter of consent
The interview will be treated completely as confidential.
You may choose to not answer any of the questions.
May I have your permission to record this interview?

e.

Structure of interview
Questions are about your experience and belief with respect to challenges arising in the course
of EPC project at South Korean shipyards
There is no right / wrong answer
Your subjective opinion on the study subject counts
Questions may not be directly related to the area of your specialty.

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2. Basic Interviewee information

How long have you stayed in South Korea? Have you visited South Korea before this project?
What is your age range?
Have you worked at other shipyards in East Asia?
Please briefly describe your role in the project.

3. Culture

a.

Cultural difference
1) What is your opinion on cultural difference between Norway and South Korea? How different
are they?

b. Contractors organization
1) In your mind, how high is the power distance between levels within Contractors organization?
2) How challenges arise within Contractors organization at different levels?
3) In your opinion, how rigid is the boundaries between disciplines or functions within
Contractors organization?
4) Do you think Contractors PMT is given enough authority by the Contractor? Is there any gap
between what you expected from the Contractors PMT and how it actually is?

c.

Relationship with Contractor

1) How do you establish relationship with Contractors personnel?
2) How do you identify your counterpart within the Contractor?
3) Do the factors which Korean uses to establish relative relationship (age, gender, title, etc.) also
influence your relationship with Koreans? What is the most influential?
4) How do you think the still male-dominating social environment in South Korea affects
establishment and management of relationship with Contractor?

d. Communication with Contractor

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1) In your opinion, what are the important communication lines in Contractors organization
during execution phase? Are they formal or informal? Are they effective?
2) Do you find the formal meeting with Contractor effective? What do you do to make the
meeting more productive?
3) How do you deal with Contractors personnel who do not respond? In your opinion, what
makes them not to respond in proper manner?
4) When is it appropriate to use formal and informal communication respectively?
5) To what extent do you agree that personal relationship can affect official business transaction?
6) What do you think about whether intermediary can help address the communication challenges
with Contractor?

e.

Trust with Contractor

1) What is the perceived level of trust with Contractor?
2) What are some of the techniques Norwegian operator employ to build trust in daily operation
as well as after work hour?
3) What are major challenges for you to build trust?

4. Contractor capability

a.

Key competences of EPC Contractor

1) What are the key competences that Contractor lacks or weak on? How to mitigate the
associated risk?

b. Functional capability
1) What are your thoughts of engineering capability of Contractor?
2) What are your thoughts of procurement capability of Contractor?
3) What are your thoughts of construction capability of Contractor?

c.

Change management
1) What are your thoughts of change management capability of Contractor?
2) In your opinion, Contractor has a correct understanding of VO regime (NTK 07)?
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d. NORSOK and Norwegian regulatory requirements

1) What are your thoughts of requirement management capability of Contractor?
2) What is your thought of Contractors capability of interpretation of NORSOK?
3) What do you do to address the challenges?

5. Communication and coordination challenges for each interface with sub-contractor

a.

Contractor Engineering sub-contractor

1) What communication and coordination issues do you observe between Contractor and
Engineering sub-contractor?
2) In your opinion, what are the major causes of those issues based on the discussions we had?
3) What are your views on the role of operator to resolve the issues?

b. Contractor Norwegian vendor

1) What communication and coordination issues do you observe between Contractor and
Norwegian vendor?
2) In your opinion, what are the major causes of those issues based on the discussions we had?
3) What are your views on the role of operator to resolve the issues?

c.

Contractor Local sub-contractor

1) What communication and coordination issues do you observe between Contractor and Local
sub-contractor?
2) In your opinion, what are the major causes of those issues based on the discussions we had?
3) What are your thoughts of the quality of local sub-contractors performance?

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